Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

As of May 2, 2003, CenterPoint Energy, Inc. had 305,480,329 shares of common
stock outstanding, including 1,407,306 ESOP shares not deemed outstanding for
financial statement purposes and excluding 166 shares held as treasury stock.

Included in this Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint
Energy, Inc. (CenterPoint Energy), together with its subsidiaries (collectively,
the Company), are CenterPoint Energy's consolidated interim financial statements
and notes (Interim Financial Statements) including these companies' wholly owned
and majority owned subsidiaries. The Company has filed a Current Report on Form
8-K dated May 12, 2003 (May 12 Form 8-K). The May 12 Form 8-K gives effect to
certain reclassifications that have been made to the Company's historical
financial statements as presented in the Annual Report on Form 10-K of
CenterPoint Energy (CenterPoint Energy Form 10-K) for the year ended December
31, 2002. The Interim Financial Statements are unaudited, omit certain financial
statement disclosures and should be read with the May 12 Form 8-K.

RESTRUCTURING

CenterPoint Energy is a public utility holding company, created on August
31, 2002 as part of a corporate restructuring of Reliant Energy, Incorporated
(Reliant Energy) that implemented certain requirements of the Texas electric
restructuring law described below. In December 2000, Reliant Energy transferred
a significant portion of its unregulated businesses to Reliant Resources, Inc.
(Reliant Resources), which, at the time, was a wholly owned subsidiary of
Reliant Energy. Reliant Resources conducted an initial public offering of
approximately 20% of its common stock in May 2001 (the Reliant Resources
Offering). In December 2001, Reliant Energy's shareholders approved an agreement
and plan of merger pursuant to which the following steps occurred on August 31,
2002 (the Restructuring):

o CenterPoint Energy became the holding company for the Reliant Energy
group of companies;

o Reliant Energy and its subsidiaries became subsidiaries of CenterPoint
Energy; and

o each share of Reliant Energy common stock was converted into one share
of CenterPoint Energy common stock.

On September 5, 2002, CenterPoint Energy announced that its board of
directors had declared a distribution of all of the shares of Reliant Resources
common stock owned by CenterPoint Energy to its common shareholders on a pro
rata basis (the Reliant Resources Distribution). The Reliant Resources
Distribution was made on September 30, 2002.

CenterPoint Energy is the successor to Reliant Energy for financial
reporting purposes under the Securities Exchange Act of 1934. The Company's
operating subsidiaries own and operate electric transmission and distribution
facilities, natural gas distribution facilities, natural gas pipelines and
electric generating plants. The Company is subject to regulation as a
"registered holding company" under the Public Utility Holding Company Act of
1935 (1935 Act). As of March 31, 2003, the Company's indirect wholly owned
subsidiaries include:

o CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which
engages in Reliant Energy's former electric transmission and
distribution business in a 5,000-square mile area of the Texas Gulf
Coast that includes Houston; and

o CenterPoint Energy Resources Corp. (CERC Corp., and, together with its
subsidiaries, CERC), formerly Reliant Energy Resources Corp. (RERC
Corp., and, together with its subsidiaries, RERC), which owns gas
distribution systems that together form one of the United States'
largest natural gas distribution operations in terms of number of
customers served. Through wholly owned subsidiaries, CERC owns two
interstate natural gas pipelines and gas gathering systems and
provides various ancillary services.

The Company also has an approximately 81% ownership interest in Texas Genco
Holdings, Inc. (Texas Genco), which owns and operates the Texas generating
plants formerly belonging to the integrated electric utility that was a part of
Reliant Energy. The Company distributed approximately 19% of the 80 million
outstanding shares of common stock of Texas Genco to the Company's shareholders
on January 6, 2003. As a result of the distribution of

5

Texas Genco common stock, CenterPoint Energy recorded an impairment charge of
$396 million, which is reflected as a regulatory asset representing stranded
costs in the Consolidated Balance Sheets as of March 31, 2003. This impairment
charge represents the excess of the carrying value of CenterPoint Energy's net
investment in Texas Genco over the market value of the Texas Genco common stock
that was distributed. The financial impact of this impairment was offset by
recording a $396 million regulatory asset reflecting the Company's expectation
of stranded cost recovery of such impairment. See Note 4(c) for a discussion of
generation related regulatory assets. Additionally, in connection with the
distribution, CenterPoint Energy recorded minority interest ownership in Texas
Genco of $146 million in its Consolidated Balance Sheets in the first quarter of
2003.

BASIS OF PRESENTATION

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

The Interim Financial Statements reflect all normal recurring adjustments
that are, in the opinion of management, necessary to present fairly the
financial position and results of operations for the respective periods. Amounts
reported in the Company's Statements of Consolidated Income are not necessarily
indicative of amounts expected for a full year period due to the effects of,
among other things, (a) seasonal fluctuations in demand for energy and energy
services, (b) changes in energy commodity prices, (c) timing of maintenance and
other expenditures and (d) acquisitions and dispositions of businesses, assets
and other interests. In addition, certain amounts from the prior year have been
reclassified to conform to the Company's presentation of financial statements in
the current year. These reclassifications do not affect net income.

Subsequent to December 31, 2002, the Company sold all of its remaining
Latin America operations. The Interim Financial Statements present these
remaining Latin America operations as discontinued operations in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). Accordingly, the
Interim Financial Statements reflect these operations as discontinued operations
for the three months ended March 31, 2002 and 2003.

The Interim Financial Statements have been prepared to reflect the effects
of the Restructuring and the Reliant Resources Distribution as described above
on the CenterPoint Energy financial statements. The Interim Financial Statements
present the Reliant Resources businesses (previously reported as the Wholesale
Energy, European Energy, and Retail Energy business segments and related
corporate costs) as discontinued operations, in accordance with SFAS No. 144.
Accordingly, the Interim Financial Statements reflect these operations as
discontinued operations for the three months ended March 31, 2002.

The following notes to the consolidated financial statements in the May 12
Form 8-K (CenterPoint Energy Notes) relate to certain contingencies. These
notes, as updated herein, are incorporated herein by reference.

Latin America. In February 2003, the Company sold its interest in Argener,
a cogeneration facility in Argentina, for $23.1 million. The carrying value of
this investment was approximately $11 million as of December 31, 2002. The
Company recorded an after-tax gain of $7 million from the sale of Argener in the
first quarter of 2003.

Revenues related to the Company's Latin America operations included in
discontinued operations for the three months ended March 31, 2002 and 2003 were
$4.5 million and $1.7 million, respectively. Income from these discontinued
operations for the three months ended March 31, 2002 and 2003 is reported net of
income tax expense of $3.2 million and $0 million, respectively.

Reliant Resources. On September 30, 2002, CenterPoint Energy distributed to
its shareholders its 83% ownership interest in Reliant Resources by means of a
tax-free spin-off in the form of a dividend. Holders of CenterPoint Energy
common stock on the record date received 0.788603 shares of Reliant Resources
common stock for each share of CenterPoint Energy stock that they owned on the
record date. The Reliant Resources Distribution was recorded in the third
quarter of 2002.

Reliant Resources' revenues included in discontinued operations for the
three months ended March 31, 2002 were $1.8 billion, as reported in Reliant
Resources' Annual Report on Form 10-K/A, Amendment No. 1, filed with the SEC on
April 30, 2003. Income from these discontinued operations for the three months
ended March 31, 2002 is reported net of income tax expense of $43 million. These
amounts have been restated to reflect Reliant Resources' adoption of Emerging
Issues Task Force (EITF) Issue No. 02-3, "Issues Related to Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" during the
third quarter of 2002.

(3) NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair
value of an asset retirement obligation to be recognized as a liability is
incurred and capitalized as part of the cost of the related tangible long-lived
assets. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Retirement obligations associated with long-lived assets included within
the scope of SFAS No. 143 are those for which a legal obligation exists under
enacted laws, statutes and written or oral contracts, including obligations
arising under the doctrine of promissory estoppel.

The Company has identified retirement obligations for nuclear
decommissioning at the South Texas Project Electric Generating Station (South
Texas Project) and for lignite mine operations at the Jewett mine supplying the
Limestone electric generation facility. Prior to adoption of SFAS No. 143, the
Company had recorded liabilities for nuclear decommissioning and the reclamation
of the lignite mine. Liabilities were recorded for estimated decommissioning
obligations of $139.7 million and $39.7 million for reclamation of the lignite
at December 31, 2002. Upon adoption of SFAS No. 143 on January 1, 2003, the
Company reversed the $139.7 million previously accrued for the nuclear
decommissioning of the South Texas Project and recorded a plant asset of $99.1
million offset by accumulated depreciation of $35.8 million as well as a
retirement obligation of $186.7 million. The $16.3 million difference between
amounts previously recorded and the amounts recorded upon adoption of SFAS No.
143 is being deferred as a liability due to regulatory requirements. The Company
also reversed the $39.7 million it had previously recorded for the Jewett mine
reclamation and recorded a plant asset of $1.9 million offset by accumulated
depreciation of $0.4 million as well as a retirement obligation of $3.8 million.
The $37.4 million difference between amounts previously recorded and the amounts
recorded upon adoption of SFAS No. 143 was recorded as a cumulative effect of
accounting change. The Company has also identified other asset retirement
obligations that cannot be calculated because the assets associated with the
retirement obligations have an indeterminate life.

7

The following represents the balances of the asset retirement obligation as
of January 1, 2003 and the additions and accretion of the asset retirement
obligation for the three months ended March 31, 2003:

The Company's rate-regulated businesses have previously recognized removal
costs as a component of depreciation expense in accordance with regulatory
treatment. As of March 31, 2003, these previously recognized removal costs of
$639 million do not represent SFAS No. 143 asset retirement obligations, but
rather embedded regulatory liabilities. The Company's non-rate regulated
businesses have also previously recognized removal costs as component of
depreciation expense. The Company reversed $115 million in the three months
ended March 31, 2003 of previously recognized removal costs with respect to
these non-rate-regulated businesses as a cumulative effect of accounting change.
The total cumulative effect of accounting change from adoption of SFAS No, 143
was $152 million. Excluded from the $80 million after-tax cumulative effect of
accounting change recorded for the three months ended March 31, 2003, is
minority interest of $19 million related to the Texas Genco stock not owned by
CenterPoint Energy.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items

8

only if they are deemed to be unusual and infrequent. SFAS No. 145 also requires
that capital leases that are modified so that the resulting lease agreement is
classified as an operating lease be accounted for as a sale-leaseback
transaction. The changes related to debt extinguishment are effective for fiscal
years beginning after May 15, 2002, and the changes related to lease accounting
are effective for transactions occurring after May 15, 2002. The Company has
applied this guidance as it relates to lease accounting and the accounting
provision related to debt extinguishment. Upon adoption of SFAS No. 145, any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods will be reclassified. No such reclassification was
required in the three month period ended March 31, 2002. The Company has
reclassified the $26 million loss on debt extinguishment related to the fourth
quarter of 2002 from an extraordinary item to interest expense.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" (EITF No. 94-3). The principal difference
between SFAS No. 146 and EITF No. 94-3 relates to the requirements for
recognition of a liability for costs associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for a cost
associated with an exit or disposal activity when it is incurred. A liability is
incurred when a transaction or event occurs that leaves an entity little or no
discretion to avoid the future transfer or use of assets to settle the
liability. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company will apply the provisions of SFAS No. 146 to all exit or
disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not materially affect the
Company's consolidated financial statements.

In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51" (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not expect the
adoption of FIN 46 to have a material impact on its results of operations or
financial condition.

(4) REGULATORY MATTERS

(a) Excess Cost Over Market (ECOM) True-Up.

Texas Genco sells, through auctions, entitlements to substantially all of
its installed electric generation capacity, excluding reserves for planned and
forced outages. From September 2001 through March 2003, it conducted auctions,
as required by the Public Utility Commission of Texas (Texas Utility Commission)
and by the Company's master separation agreement with Reliant Resources. Texas
Genco will conduct the final auction mandated by the Texas Utility Commission
for the purposes of the ECOM True-Up in July 2003.

The capacity auctions continue to be consummated at market-based prices
that are substantially below the estimate of those prices made by the Texas
Utility Commission in the Spring of 2001. The Texas electric restructuring law
provides for the recovery in a "true-up" proceeding in 2004 (2004 True-Up
Proceeding) of any difference between market power prices and the earlier
estimates of those market prices by the Texas Utility Commission, using the
prices received in the auctions required by the Texas Utility Commission as the
measure of

9

market prices (ECOM True-Up). For the three months ended March 31, 2002 and
2003, CenterPoint Energy recorded approximately $141 million and $132 million,
respectively, in non-cash revenue related to the cost recovery of the difference
between the market power prices and the Texas Utility Commission's earlier
estimates. For additional information regarding the capacity auctions and the
related true-up proceeding, please read Notes 3(e) and 4(a) to the CenterPoint
Energy Notes, which are incorporated herein by reference.

(b) Generation Asset Impairment Contingency.

The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 144. As of March 31, 2003, no impairment had been
indicated in its Texas generation assets. The Company anticipates that future
events, such as changes in the market value of the Texas Genco stock, a change
in the estimated holding period of the Texas generation assets, or a change in
market demand for electricity, will require the Company to re-evaluate these
assets for impairment between now and 2004. If an impairment is indicated, it
could be material and may not be fully recoverable through the 2004 True-Up
Proceeding.

The Texas electric restructuring law provides for the Company to recover
the regulatory book value of its Texas generating assets (as defined in the
Texas electric restructuring law) to the extent the regulatory book value
exceeds the estimated market value. If the Texas generating assets are sold in
the future, a loss on sale of these assets, or an impairment of the recorded
recoverable electric generation plant mitigation regulatory asset, will occur to
the extent the recorded book value of the Texas generating assets exceeds the
regulatory book value. As of March 31, 2003, the recorded book value was $518
million in excess of the regulatory book value. This amount declines as the
recorded book value is depreciated and increases by the amount of
non-environmental capital expenditures incurred prior to May 1, 2003. For
further discussion of the difference between the regulatory book value and the
recorded book value, see Note 4(a) to the CenterPoint Energy Notes.

(c) Regulatory Assets Contingency.

As of March 31, 2003, in contemplation of the 2004 True-Up Proceeding,
CenterPoint Houston has recorded a regulatory asset of $2.5 billion representing
the estimated future recovery of previously incurred stranded costs. This amount
includes $1.1 billion of previously recorded accelerated depreciation (an amount
equal to earnings above a stated overall annual rate of return on invested
capital that was used to recover the Company's investment in generation assets)
and redirected depreciation of $841 million, both reversed in 2001 as well as
$396 million related to the Texas Genco distribution as discussed in Note 1.
Offsetting this regulatory asset is a $932 million regulatory liability to
refund the excess mitigation to ratepayers. This estimated recovery is based
upon current projections of the market value of the Company's Texas generation
assets to be covered by the 2004 True-Up Proceeding calculations. The regulatory
liability reflects a current refund obligation arising from prior mitigation of
stranded costs deemed excessive by the Texas Utility Commission. CenterPoint
Houston began refunding excess mitigation credits with January 2002 bills. These
credits are to be refunded over a seven-year period. Because GAAP requires
CenterPoint Houston to estimate fair market values in advance of the final
reconciliation, the financial impacts of the Texas electric restructuring law
with respect to the final determination of stranded costs in the 2004 True-Up
Proceeding are subject to material changes. Factors affecting such changes may
include estimation risk, uncertainty of future energy and commodity prices and
the economic lives of the plants. If events were to occur that made the recovery
of some of the remaining generation related regulatory assets no longer
probable, the Company would write off the unrecoverable balance of such assets
as a charge against earnings.

(d) Fuel Reconciliation Contingency.

CenterPoint Houston and Texas Genco filed their joint application to
reconcile fuel revenues and expenses with the Texas Utility Commission on July
1, 2002. This final fuel reconciliation filing covers reconcilable fuel revenue,
fuel expense and interest of approximately $8.5 billion incurred from August 1,
1997 through January 30, 2002. Also included in this amount is an under-recovery
of $94 million, which was the balance at July 31, 1997 as approved in
CenterPoint Houston's last fuel reconciliation. On March 3, 2003, a settlement
agreement was filed under which certain items totaling $24 million would be
written off during the fourth quarter of 2002 and items totaling $203 million
would be carried forward for resolution by the Texas Utility Commission in late
2003 or early 2004.

10

(5) DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options (Energy Derivatives) to mitigate the impact of changes in cash flows of
its natural gas businesses on its operating results and cash flows.

Cash Flow Hedges. During the three months ended March 31, 2003, no hedge
ineffectiveness was recognized in earnings from derivatives that are designated
and qualify as cash flow hedges. No component of the derivative instruments'
gain or loss was excluded from the assessment of effectiveness. During the three
months ended March 31, 2003, there was no effect on earnings as a result of the
discontinuance of cash flow hedges. As of March 31, 2003, the Company expects
$2.3 million in accumulated other comprehensive income to be reclassified into
net income during the next twelve months.

Interest Rate Swaps. As of March 31, 2003, the Company had outstanding
interest rate swaps with an aggregate notional amount of $750 million to fix the
interest rate applicable to floating rate long-term debt. These swaps do not
qualify as cash flow hedges under SFAS No. 133, and are marked to market in the
Company's Consolidated Balance Sheets with changes reflected in interest expense
in the Statements of Consolidated Income.

During 2002, the Company settled its forward-starting interest rate swaps
having a notional amount of $1.5 billion at a cost of $156 million, which was
recorded in other comprehensive income, and reclassified $36 million to interest
expense in 2002 as a result of interest payments it believes are no longer
probable of occurring for certain periods including the first three months of
2003. The remaining $120 million in other comprehensive income will be amortized
into interest expense in the same period during which the forecasted payments
affect earnings. No amortization of this amount was recognized in the first
three months of 2003. Based on the expected timing of the forecasted
transactions hedged by the forward-starting interest rate swaps, amortization of
amounts deferred in accumulated other comprehensive income will be amortized
into earnings beginning in April 2003 and are expected to amount to $11.9
million in 2003.

(6) GOODWILL AND INTANGIBLES

The components of the Company's other intangible assets consist of the
following:

The Company recognizes specifically identifiable intangibles, including
land use rights and permits, when specific rights and contracts are acquired.
The Company has no intangible assets with indefinite lives recorded as of March
31, 2003. The Company amortizes other acquired intangibles on a straight-line
basis over the lesser of their contractual or estimated useful lives that range
from 40 to 75 years for land use rights and 4 to 25 years for other intangibles.

Amortization expense for other intangibles for the three months ended March
31, 2002 and 2003 was $0.4 million and $0.5 million, respectively. Estimated
amortization expense for the remainder of 2003 and the five succeeding fiscal
years is as follows (in millions):

CenterPoint Energy has 1,020,000,000 authorized shares of capital stock,
comprised of 1,000,000,000 shares of $0.01 par value common stock and 20,000,000
shares of $0.01 par value preferred stock. At December 31, 2002, 305,017,330
shares of CenterPoint Energy common stock were issued and 300,101,587 shares of
CenterPoint Energy common stock were outstanding. At March 31, 2003, 305,436,836
shares of CenterPoint Energy common stock were issued and 301,664,118 shares of
CenterPoint Energy common stock were outstanding. Outstanding common shares
exclude (a) shares pledged to secure a loan to CenterPoint Energy's Employee
Stock Ownership Plan (4,915,577 and 3,772,552 at December 31, 2002 and March 31,
2003, respectively) and (b) treasury shares (166 at both December 31, 2002 and
March 31, 2003). Reliant Energy declared a dividend of $0.375 per share in the
first quarter of 2002 and CenterPoint Energy declared a dividend of $0.10 per
share in the first quarter of 2003.

(9) SHORT-TERM BORROWINGS, LONG-TERM DEBT AND RECEIVABLES FACILITY

(a) Short-term Borrowings.

Credit Facilities. As of March 31, 2003, a subsidiary of CenterPoint Energy
had credit facilities that provided for an aggregate of $200 million in
committed credit that is classified as short-term. As of March 31, 2003, such
credit facilities were not utilized. As of March 31, 2003, cash aggregating $279
million was invested in a money market fund.

On February 28, 2003, the Company's $3.85 billion bank facility was amended
and extended to June 2005 as discussed below in " -- Long-term Debt." Loans
under this facility are recorded as long-term debt in the Consolidated Balance
Sheets at both December 31, 2002 and March 31, 2003.

12

On March 25, 2003, CERC obtained a $200 million revolving credit facility
referenced above that terminates on March 23, 2004. Rates for borrowings under
this facility, including the facility fee, are LIBOR plus 250 basis points based
on current credit ratings and the applicable pricing grid. There were no amounts
outstanding under this facility as of March 31, 2003.

The bank facilities contain various business and financial covenants. The
borrowers are currently in compliance with the covenants under the applicable
credit agreements.

(b) Long-term Debt.

On February 28, 2003, the Company reached agreement with a syndicate of
banks on a second amendment to its $3.85 billion bank facility (Second
Amendment). Under the Second Amendment, the maturity date of the bank facility
was extended from October 2003 to June 30, 2005, and the $1.2 billion in
mandatory prepayments that would have been required in 2003 (including $600
million due on February 28, 2003) were eliminated. At the time of the Second
Amendment, the facility consisted of a $2.35 billion term loan and a $1.5
billion revolver. In March 2003, a $50 million repayment of the term loan
reduced the term loan to $2.30 billion. At March 31, 2003, the revolver was
fully utilized. Borrowings bear interest based on LIBOR rates under a pricing
grid tied to the Company's credit rating. At the Company's current credit
ratings, the pricing for loans remains the same. The drawn cost for the facility
at the Company's current ratings is LIBOR plus 450 basis points. The Company has
agreed to pay the banks an extension fee of 75 basis points on the amounts
outstanding under the bank facility on October 9, 2003. The Company also paid
$41 million in fees that were due on February 28, 2003, along with $20 million
in fees that had been due on June 30, 2003.

In addition, the interest rate will be increased by 25 basis points
beginning May 28, 2003 if the Company does not grant the banks a security
interest in its 81% stock ownership of Texas Genco. Granting the security
interest in the stock of Texas Genco requires approval from the SEC under the
1935 Act, which is currently being sought. That security interest would be
released at the time of a sale of Texas Genco, which may occur as early as 2004.
Proceeds from any sale will be used to reduce the bank facility.

Also under the Second Amendment, on or before May 28, 2003, the Company
agreed to grant to the banks warrants to purchase up to 10%, on a fully diluted
basis, of its common stock at a price equal to the greater of $6.56 per share or
110% of the closing price on the New York Stock Exchange on the date the
warrants are issued. The warrants would not be exercisable for a year after
issuance but would remain outstanding for four years; provided, that if the
Company reduces the term loans owed under the bank facility during 2003 by
specified amounts, the warrants will be extinguished. To the extent that the
Company reduces the term loans owed under the bank facility by up to $400
million on or before May 28, 2003, up to half of the warrants will be
extinguished on a basis proportionate to the reduction in the credit facility.
To the extent such warrants are not extinguished on or before May 28, 2003, they
will vest and become exercisable in accordance with their terms. At March 31,
2003, the Company had reduced the term loans owed under the bank facility by
$50 million. Whether or not the Company is able to extinguish warrants on or
before May 28, 2003, the remaining 50% of the warrants will be extinguished,
again on a proportionate basis, if the Company reduces the term loans owed
under the bank facility by up to $400 million by the end of 2003. The Company
plans to eliminate the warrants entirely before they vest by accessing the
capital markets to fund the total payments of $800 million during 2003; however,
there can be no assurance that the Company will be able to extinguish the
warrants or to do so on favorable terms.

The warrants and the underlying common stock would be registered with the
SEC and could be exercised either through the payment of the purchase price or
on a "cashless" basis under which the Company would issue a number of shares
based upon the difference between the then-current market price and the warrant
exercise price. Issuance of the warrants is also subject to obtaining SEC
approval under the 1935 Act, which is currently being sought. If that approval
is not obtained on or before May 28, 2003, the Company will provide the banks
equivalent cash compensation over the term that its warrants would have been
exercisable to the extent they are not otherwise extinguished.

In the Second Amendment, the Company also agreed that its quarterly common
stock dividend will not exceed $0.10 per share. If the Company has not reduced
the bank facility by a total of at least $400 million by the end of 2003, of
which at least $200 million has come from the issuance of capital stock or
securities linked to capital stock (such as convertible debt), the maximum
dividend payable during 2004 and for the balance of the term of the facility

13

is subject to an additional test. Under that test the maximum permitted
quarterly dividend will be the lesser of (i) $0.10 per share or (ii) 12.5% of
the Company's net income per share for the 12 months ended on the last day of
the previous quarter.

The Second Amendment provides that proceeds from capital stock or
indebtedness issued or incurred by the Company must be applied (subject to a
$200 million basket for CERC and another $250 million basket for borrowings by
the Company, certain permitted refinancings of existing debt and other limited
exceptions) to repay bank loans and permanently reduce the bank facility.
Similarly, cash proceeds from the sale of assets of more than $30 million or, if
less, a group of sales aggregating more than $100 million, must be applied to
repay bank loans and reduce the bank facility, except that proceeds of up to
$120 million can be reinvested in the Company's businesses.

On March 18, 2003, CenterPoint Houston issued $762.3 million aggregate
principal amount of general mortgage bonds composed of $450 million principal
amount of 10-year bonds with an interest rate of 5.7% and $312.3 million
principal amount of 30-year bonds with an interest rate of 6.95%. Proceeds were
used to repay $150 million aggregate principal amount of medium-term notes
maturing on April 21, 2003, to redeem approximately $312.3 million aggregate
principal amount of CenterPoint Houston's first mortgage bonds and to repay $279
million of a $537 million intercompany note payable to CenterPoint Energy by
CenterPoint Houston. Proceeds from the note repayment were ultimately used by
CenterPoint Energy to repay borrowings under CenterPoint Energy's $3.85 billion
credit facility and to permanently reduce the term loan component of the credit
facility by $50 million.

On March 25 and April 14, 2003, CERC issued $650 million and $112 million,
respectively, aggregate principal amount of 7.875% senior unsecured notes due in
2013. A portion of the proceeds were used to refinance $360 million aggregate
principal amount of CERC's 6 3/8% Term Enhanced ReMarketable Securities (TERM
Notes) and to pay costs associated with the refinancing. Proceeds were also used
to repay borrowings under CERC's $350 million revolving credit facility prior to
its expiration on March 31, 2003. The remaining $140 million aggregate principal
amount of TERM Notes are due to be refinanced or remarketed in November 2003.

On April 9, 2003, the Company remarketed $175 million aggregate principal
amount of pollution control bonds that it had owned since the fourth quarter of
2002. Remarketed bonds maturing in 2029 have a principal amount of $75 million
and an interest rate of 8%. Remarketed bonds maturing in 2018 have a principal
amount of $100 million and an interest rate of 7.75%. Proceeds from the
remarketing were used to repay bank debt. At December 31, 2002, the $175 million
of bonds owned by the Company were not reflected as outstanding debt in the
Company's Consolidated Balance Sheets.

(c) Receivables Facility.

In connection with CERC's November 2002 amendment and extension of its $150
million receivables facility, CERC Corp. formed a bankruptcy remote subsidiary
for the sole purpose of buying and selling receivables created by CERC. This
transaction is accounted for as a sale of receivables under the provisions of
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and, as a result, the related receivables are
excluded from the Consolidated Balance Sheets. As of December 31, 2002 and March
31, 2003, CERC had utilized $107 million and $150 million of its receivables
facility, respectively.

14

(10) TRUST PREFERRED SECURITIES

(a) CenterPoint Energy.

Statutory business trusts created by CenterPoint Energy have issued trust
preferred securities, the terms of which, and the related series of junior
subordinated debentures, are described below (in millions):

For additional information regarding these securities, see Note 10 to the
CenterPoint Energy Notes, which note is incorporated herein by reference. The
sole asset of each trust consists of junior subordinated debentures of
CenterPoint Energy having interest rates and maturity dates that correspond to
the distribution rates and the mandatory redemption dates for each series of
preferred securities or capital securities, and the principal amounts
corresponding to the common and preferred securities or capital securities
issued by that trust.

(b) CERC Corp.

A statutory business trust created by CERC Corp. has issued convertible
preferred securities. The convertible preferred securities are mandatorily
redeemable upon the repayment of the convertible junior subordinated debentures
at their stated maturity or earlier redemption. Effective January 7, 2003, the
convertible preferred securities are convertible at the option of the holder
into $33.62 of cash and 2.34 shares of CenterPoint Energy common stock for each
$50 of liquidation value. As of December 31, 2002 and March 31, 2003, $0.4
million liquidation amount of convertible preferred securities were outstanding.
The securities, and their underlying convertible junior subordinated debentures,
bear interest at 6.25% and mature in June 2026.

The sole asset of the trust consists of convertible junior subordinated
debentures of CERC having an interest rate and maturity date that correspond to
the distribution rate and the mandatory redemption date of the convertible
preferred securities, and the principal amount corresponding to the common and
convertible preferred securities issued by the trust. For additional information
regarding these securities, see Note 10 to the CenterPoint Energy Notes, which
note is incorporated herein by reference.

15

(11) STOCK-BASED INCENTIVE COMPENSATION PLANS

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), and SFAS No. 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure -- an Amendment of SFAS No. 123," the Company applies
the guidance contained in Accounting Principles Board Opinion No. 25 and
discloses the required pro forma effect on net income of the fair value based
method of accounting for stock compensation.

Pro forma information for the three months ended March 31, 2002 and 2003 is
provided to take into account the amortization of stock-based compensation to
expense on a straight-line basis over the vesting period. Had compensation costs
been determined as prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been as follows:

The Company's predecessor, Reliant Energy, and certain of its former
subsidiaries are named as defendants in several lawsuits described below. Under
a master separation agreement between Reliant Energy and Reliant Resources, the
Company and its subsidiaries are entitled to be indemnified by Reliant Resources
for any losses arising out of the lawsuits described under "California Class
Actions and Attorney General Cases," "Long-Term Contract Class Action,"
"Washington and Oregon Class Actions," "Bustamante Price Reporting Class
Action," "Gas Trading Class Action" and "Trading and Marketing Activities,"
including attorneys' fees and other costs. Pursuant to the indemnification
obligation, Reliant Resources is defending the Company and its subsidiaries to
the extent named in these lawsuits. The ultimate outcome of these matters cannot
be predicted at this time.

California Class Actions and Attorney General Cases. Reliant Energy,
Reliant Resources, Reliant Energy Power Generation, Inc. (REPG) and several
other subsidiaries of Reliant Resources, as well as two former officers and one
present officer of some of these companies, have been named as defendants in
class action lawsuits and other lawsuits filed against a number of companies
that own generation plants in California and other sellers of electricity in
California markets. While the plaintiffs allege various violations by the
defendants of antitrust laws and state laws against unfair and unlawful business
practices, each of the lawsuits is grounded on the central allegation that the
defendants conspired to drive up the wholesale price of electricity. In addition
to injunctive relief, the plaintiffs in these lawsuits seek treble the amount of
damages alleged, restitution of alleged overpayments, disgorgement of alleged
unlawful profits for sales of electricity, costs of suit and attorneys' fees.
The first six of these suits originally were filed in state courts in San Diego,
San Francisco and Los Angeles Counties. The suits in San Diego and Los Angeles
Counties were consolidated and removed to the federal district court in San
Diego, but on December 13, 2002, that court remanded the suits to the state
courts. Prior to the remand, Reliant Energy was voluntarily dismissed from two
of the suits. Several parties, including the Reliant defendants, have appealed
the judge's remand decision. The United States court of appeals has entered a
briefing schedule that could result in oral arguments by summer of

16

2003 and stayed the remand order pending the appeal.

In March and April 2002, the California Attorney General filed three
complaints, two in state court in San Francisco and one in the federal district
court in San Francisco, against Reliant Energy, Reliant Resources, Reliant
Energy Services and other subsidiaries of Reliant Resources alleging, among
other matters, violations by the defendants of state laws against unfair and
unlawful business practices arising out of transactions in the markets for
ancillary services run by the California independent systems operator, charging
unjust and unreasonable prices for electricity, in violation of antitrust laws
in connection with the acquisition in 1998 of electric generating facilities
located in California. The complaints variously seek restitution and
disgorgement of alleged unlawful profits for sales of electricity, civil
penalties and fines, injunctive relief against unfair competition, divestment of
Reliant Resources' generation capacity and undefined equitable relief. Reliant
Resources removed the two state court cases to the federal district court in San
Francisco. In August 2002, the district court dismissed the two cases originally
filed in state court and also dismissed the damages claims asserted in the
antitrust case. The Attorney General has appealed the dismissal of these cases
to the court of appeals.

Following the filing of the Attorney General cases, seven additional class
action cases were filed in state courts in Northern California. Each of these
purports to represent the same class of California ratepayers, assert the same
claims as asserted in the other California class action cases, and in some
instances repeat as well the allegations in the Attorney General cases. All of
these cases have been removed to federal district court in San Diego. Reliant
Resources has not filed an answer in any of these cases.

In all of these cases pending before the federal and state courts in
California, the Reliant defendants have filed or intend to file motions to
dismiss on grounds that the claims are barred by federal preemption and the
filed rate doctrine.

Long-Term Contract Class Action. In October 2002, a class action was filed
in state court in Los Angeles against Reliant Energy and several subsidiaries of
Reliant Resources. The complaint in this case repeats the allegations asserted
in the California class actions as well as the Attorney General cases and also
alleges misconduct related to long-term contracts purportedly entered into by
the California Department of Water Resources. None of the Reliant entities,
however, has a long-term contract with the Department of Water Resources. This
case has been removed to federal district court in San Diego. The Reliant
defendants intend to file motions to dismiss on grounds that the claims are
barred by federal preemption and the filed rate doctrine.

Washington and Oregon Class Actions. In December 2002, a lawsuit was filed
in Circuit Court of the State of Oregon for the County of Multnomah on behalf of
a class of all Oregon purchasers of electricity and natural gas. Reliant Energy,
Reliant Resources and several Reliant Resources subsidiaries are named as
defendants, along with many other electricity generators and marketers. Like the
other lawsuits filed in California, the plaintiffs claim the defendants
manipulated wholesale power prices in violation of state and federal law. The
plaintiffs seek injunctive relief and payment of damages based on alleged
overcharges for electricity. Also in December 2002, a nearly identical lawsuit
on behalf of consumers in the State of Washington was filed in federal district
court in Seattle. Reliant Resources has removed the Oregon suit to federal
district court in Portland. It is anticipated that before answering the
lawsuits, the defendants will file motions to dismiss on the grounds that the
claims are barred by federal preemption and by the filed rate doctrine.

Bustamante Price Reporting Class Action. In November 2002, California
Lieutenant Governor Cruz Bustamante filed a lawsuit in state court in Los
Angeles on behalf of a class of purchasers of gas and power alleging violations
of state antitrust laws and state laws against unfair and unlawful business
practices based on an alleged conspiracy to report and publish false and
fraudulent natural gas prices with an intent to affect the market prices of
natural gas and electricity in California. Reliant Energy, Reliant Resources and
several Reliant Resources subsidiaries are named as defendants, along with other
market participants and publishers of some of the price indices. The complaint
seeks injunctive relief, compensatory and punitive damages, restitution of
alleged overpayment, disgorgement of all profits and funds acquired by the
alleged unlawful conduct, costs of suit and attorneys' fees. The Reliant
defendants intend to deny both their alleged violation of any laws and their
alleged participation in any conspiracy.

Gas Trading Class Action. The Company, Reliant Resources and Reliant
Energy, have been named as defendants in a lawsuit filed in April 2003 in state
court in Los Angeles County, California on behalf

17

of a class of purchasers of natural gas alleging violations of state antitrust
laws and state laws against unfair and unlawful business practices based on an
alleged conspiracy with Enron Corp. to manipulate the California natural gas
markets in 2000 and 2001. The complaint is based on certain conclusions in a
report by the staff of the Federal Energy Regulatory Commission that has not
been subject to procedures designed to allow parties to either discover or test
the basis for the conclusions. The complaint seeks injunctive and declaratory
relief, compensatory and punitive damages, restitution, costs of suit and
attorneys' fees. The complaint alleges that there were "well over one billion
dollars in excess charges to California consumers during the 2000 through 2001
time period." The plaintiffs are seeking a trebling of any damages award. While
Reliant Resources has not yet filed an answer, the Company understands that
Reliant Resources intends to deny both the alleged violation of any laws and the
participation in a conspiracy with Enron. Neither the Company nor Reliant Energy
was a party in the proceedings in which the report was submitted. Further,
neither the Company nor any of its current subsidiaries has ever engaged in gas
trading in California.

Trading and Marketing Activities. Reliant Energy has been named as a party
in several lawsuits and regulatory proceedings relating to the trading and
marketing activities of its former subsidiary, Reliant Resources.

In June 2002, the SEC advised Reliant Resources and Reliant Energy that it
had issued a formal order in connection with its investigation of Reliant
Resources' and Reliant Energy's financial reporting, internal controls and
related matters. The Company understands that the investigation is focused on
Reliant Resources' same-day commodity trading transactions involving purchases
and sales with the same counterparty for the same volume at substantially the
same price and certain structured transactions. These matters were previously
the subject of an informal inquiry by the SEC. On May 12, 2003, the SEC advised
Reliant Resources and Reliant Energy that it had issued a formal order in
connection with this investigation. Reliant Energy, through its successor and
our subsidiary, CenterPoint Houston, has entered into a settlement with the SEC
that concludes this investigation. Under the settlement, Reliant Resources and
Reliant Energy consented to the entry of an administrative cease-and-desist
order with respect to future violations of certain provisions of the Securities
Act of 1933 and the Securities Exchange Act of 1934, without admitting or
denying the SEC's findings that violations of these laws had occurred. The SEC
did not assess monetary penalties or fines against Reliant Energy, us or any of
our subsidiaries.

In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the ERCOT market on and after July
31, 2001, Reliant Energy and Reliant Resources have provided information to the
Texas Utility Commission concerning their scheduling and trading activities.

Fifteen class action lawsuits filed in May, June and July 2002 on behalf of
purchasers of securities of Reliant Resources and/or Reliant Energy have been
consolidated in federal district court in Houston. Reliant Resources and certain
of its former and current executive officers are named as defendants. Reliant
Energy is also named as a defendant in seven of the lawsuits. Two of the
lawsuits also name as defendants the underwriters of the Reliant Resources
initial public offering (Reliant Resources Offering). One lawsuit names Reliant
Resources' and Reliant Energy's independent auditors as a defendant. The
consolidated amended complaint seeks monetary relief purportedly on behalf of
three classes: (1) purchasers of Reliant Energy common stock from February 3,
2000 to May 13, 2002; (2) purchasers of Reliant Resources common stock on the
open market from May 1, 2001 to May 13, 2002; and (3) purchasers of Reliant
Resources common stock in the Reliant Resources Offering or purchasers of shares
that are traceable to the Reliant Resources Offering. The plaintiffs allege,
among other things, that the defendants misrepresented their revenues and
trading volumes by engaging in round-trip trades and improperly accounted for
certain structured transactions as cash-flow hedges, which resulted in earnings
from these transactions being accounted for as future earnings rather than being
accounted for as earnings in fiscal year 2001.

In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of Reliant Resources for alleged violations of federal
securities laws. The plaintiffs in this lawsuit allege that the defendants
violated federal securities laws by issuing false and misleading statements to
the public, and that the defendants made false and misleading statements as part
of an alleged scheme to inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of fraudulent and negligent
misrepresentation and violations of Illinois consumer law. The defendants expect
to file a motion to transfer this lawsuit to the federal district court in
Houston and to consolidate this lawsuit with the consolidated lawsuits described
above.

18

The Company believes that none of these lawsuits has merit because, among
other reasons, the alleged misstatements and omissions were not material and did
not result in any damages to any of the plaintiffs.

In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Reliant Energy and its directors are named as
defendants in all of the lawsuits. Two of the lawsuits have been dismissed
without prejudice. The remaining lawsuit alleges that the defendants breached
their fiduciary duties to various employee benefits plans, directly or
indirectly sponsored by Reliant Energy, in violation of the Employee Retirement
Income Security Act. The plaintiffs allege that the defendants permitted the
plans to purchase or hold securities issued by Reliant Energy when it was
imprudent to do so, including after the prices for such securities became
artificially inflated because of alleged securities fraud engaged in by the
defendants. The complaints seek monetary damages for losses suffered by a
putative class of plan participants whose accounts held Reliant Energy or
Reliant Resources securities, as well as equitable relief in the form of
restitution.

In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of the Company. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused the Company to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off and the Reliant
Resources Offering. The complaint seeks monetary damages on behalf of the
Company as well as equitable relief in the form of a constructive trust on the
compensation paid to the defendants. On March 13, 2003, the court dismissed this
case on the grounds that the plaintiff did not make an adequate demand on the
Company before filing suit. On March 26, 2003, the plaintiff sent another demand
asserting the same claims.

The Company's board of directors is investigating that demand and similar
allegations made in a June 28, 2002 demand letter sent on behalf of a Company
shareholder. The latter letter states that the shareholder and other
shareholders are considering filing a derivative suit on behalf of the Company
and demands that the Company take several actions in response to alleged
round-trip trades occurring in 1999, 2000, and 2001. The Board is reviewing the
demands made by the shareholders to determine if these proposed actions are in
the best interests of the Company.

Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena filed suit, for themselves and a
proposed class of all similarly situated cities in Reliant Energy's electric
service area, against Reliant Energy and Houston Industries Finance, Inc.
(formerly a wholly owned subsidiary of Reliant Energy) alleging underpayment of
municipal franchise fees. The plaintiffs claim that they are entitled to 4% of
all receipts of any kind for business conducted within these cities over the
previous four decades. A jury trial of the original claimant cities (but not the
class of cities) in the 269th Judicial District Court for Harris County, Texas,
ended in April 2000 (the Three Cities case). Although the jury found for Reliant
Energy on many issues, it found in favor of the original claimant cities on
three issues, and assessed a total of $4 million in actual and $30 million in
punitive damages. However, the jury also found in favor of Reliant Energy on the
affirmative defense of laches, a defense similar to a statute of limitations
defense, due to the original claimant cities having unreasonably delayed
bringing their claims during the 43 years since the alleged wrongs began. The
trial court in the Three Cities case granted most of Reliant Energy's motions to
disregard the jury's findings. The trial court's rulings reduced the judgment to
$1.7 million, including interest, plus an award of $13.7 million in legal fees.
In addition, the trial court granted Reliant Energy's motion to decertify the
class. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.

On February 27, 2003, the state court of appeals in Houston rendered an
opinion reversing the judgment against the Company and rendering judgment that
the Three Cities take nothing by their claims. The court of appeals found that
the jury's finding of laches barred all of the Three Cities' claims and that the
Three Cities were not entitled to recovery of any attorneys' fees. The judgment
of the court of appeals is subject to an appeal to the Texas Supreme Court.

The extent to which issues in the Three Cities case may affect the claims
of the other cities served by Reliant Energy cannot be assessed until judgments
are final and no longer subject to appeal. However, the court of appeals' ruling
appears to be consistent with Texas Supreme Court opinions. The Company
estimates the range of possible outcomes for recovery by the plaintiffs in the
Three Cities case to be between $-0- and $18 million inclusive of

19

interest and attorneys' fees.

Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claims Act against RERC Corp. (now CERC Corp.) and certain of its
subsidiaries alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.

In addition, CERC Corp., CenterPoint Energy Gas Transmission Company,
CenterPoint Energy Field Services, Inc., and CenterPoint Energy-Mississippi
River Transmission Corporation are defendants in a class action filed in May
1999 against approximately 245 pipeline companies and their affiliates. The
plaintiffs in the case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to systematic gas
mismeasurement by the defendants for more than 25 years. The plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. On April 10, 2003, the judge denied the plaintiffs' motion to
certify the requested class. Plaintiffs have requested and secured 30 days to
amend their petition and may seek to redefine the class to comply with the
judge's findings. The action is currently pending in state court in Stevens
County, Kansas.

City of Tyler, Texas, Gas Costs Review. By letter to CenterPoint Energy
Entex (Entex) dated July 31, 2002, the City of Tyler, Texas, forwarded various
computations of what it believes to be excessive costs ranging from $2.8 million
to $39.2 million for gas purchased by Entex for resale to residential and small
commercial customers in that city under supply agreements in effect since 1992.
Entex's gas costs for its Tyler system are recovered from customers pursuant to
tariffs approved by the city and filed with both the city and the Railroad
Commission of Texas (the Railroad Commission). Pursuant to an agreement, on
January 29, 2003, Entex and the city filed a Joint Petition for Review of
Charges for Gas Sales (Joint Petition) with the Railroad Commission. The Joint
Petition requests that the Railroad Commission determine whether Entex has
properly and lawfully charged and collected for gas service to its residential
and commercial customers in its Tyler distribution system for the period
beginning November 1, 1992, and ending October 31, 2002. The Company believes
that all costs for Entex's Tyler distribution system have been properly included
and recovered from customers pursuant to Entex's filed tariffs and that the city
has no legal or factual support for the statements made in its letter.

Gas Cost Recovery Suits. In October 2002, a suit was filed in state
district court in Wharton County, Texas against the Company, CERC, Entex Gas
Marketing Company, and others alleging fraud, violations of the Texas Deceptive
Trade Practices Act, violations of the Texas Utility Code, civil conspiracy and
violations of the Texas Free Enterprise and Antitrust Act. The plaintiffs seek
class certification, but no class has been certified. The plaintiffs allege that
defendants inflated the prices charged to certain consumers of natural gas. In
February 2003, a similar suit was filed against CERC in state court in Caddo
Parish, Louisiana purportedly on behalf of a class of residential or business
customers in Louisiana who allegedly have been overcharged for gas or gas
service provided by CERC. The plaintiffs in both cases seek restitution for the
alleged overcharges, exemplary damages and penalties. The Company denies that
CERC has overcharged any of its customers for natural gas and believes that the
amounts recovered for purchased gas have been in accordance with what is
permitted by state regulatory authorities.

Supplier Suits. Texas Genco is currently engaged in a dispute with its fuel
supplier at its Limestone electric generation facility over the terms and
pricing for fuel supplied to that facility under a 1999 settlement agreement
between the parties and under ancillary obligations. On May 6, 2003, Texas
Genco filed suit for a declaratory judgment against the supplier, Northwestern
Resources Co. (NWR), in Harris County, Texas, and NWR filed similar claims for a
declaratory judgment in an action previously filed against Reliant Energy in
Limestone County, Texas. NWR claims Texas Genco has breached its obligations by
modifying its generation facility to burn coal from the Powder River Basin and
by purchasing coal from the Powder River Basin without first giving NWR a right
of first refusal to supply lignite at a price that is equal to or less than coal
from the Powder River Basin. NWR also contends that Texas Genco is not entitled
to certain production royalties. In its suit, Texas Genco seeks rulings that it
has not breached its obligations regarding the modification of its facilities
and the burning of Powder River Basin coal but that, instead, NWR has breached
its

20

obligations by failing to pay production royalties and in other respects. The
ultimate outcome of this dispute cannot be determined at this time.

Other Proceedings. The Company is involved in other proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business. The Company's management
currently believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

(b) Environmental Matters.

Clean Air Standards. The Texas electric restructuring law and regulations
adopted by the Texas Commission on Environmental Quality in 2001 require
substantial reductions in emission of oxides of nitrogen (NOx) from electric
generating units. The Company is currently installing cost-effective controls at
its generating plants to comply with these requirements. Through March 31, 2003,
the Company has invested $582 million for NOx emission control, and plans to
make expenditures of up to approximately $200 million for the remainder of 2003
through 2007. The Texas electric restructuring law provides for stranded cost
recovery for expenditures incurred before May 1, 2003 to achieve the NOx
reduction requirements. Incurred costs include costs for which contractual
obligations have been made. The Texas Utility Commission has determined that the
Company's emission control plan is the most cost-effective option for achieving
compliance with applicable air quality standards for the Company's generating
facilities and the final amount for recovery will be determined in the 2004
True-Up Proceeding.

Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against Reliant Energy Gas Transmission Company (REGT), Reliant Energy Pipeline
Services, Inc., RERC Corp., RES, other Reliant Energy entities and third parties
in the 1st Judicial District Court, Caddo Parish, Louisiana. The petition has
now been supplemented seven times. As of May 1, 2003, there were 572 plaintiffs,
a majority of whom are Louisiana residents. In addition to the Reliant Energy
entities, the plaintiffs have sued the State of Louisiana through its Department
of Environmental Quality, several individuals, some of whom are present
employees of the State of Louisiana, the Bayou South Gas Gathering Company,
L.L.C., Martin Timber Company, Inc., and several trusts. Additionally on April
4, 2002, two plaintiffs filed a separate suit with identical allegations against
the same parties in the same court. More recently, on January 6, 2003, two other
plaintiffs filed a third suit of similar allegations against the Company, as
well as other defendants, in Bossier Parish (26th Judicial District Court).

The suits allege that, at some unspecified date prior to 1985, the
defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox
Aquifer, which lies beneath property owned or leased by certain of the
defendants and which is the sole or primary drinking water aquifer in the area.
The primary source of the contamination is alleged by the plaintiffs to be a gas
processing facility in Haughton, Bossier Parish, Louisiana known as the "Sligo
Facility." This facility was purportedly used for gathering natural gas from
surrounding wells, separating gasoline and hydrocarbons from the natural gas for
marketing, and transmission of natural gas for distribution. This site was
originally leased and operated by predecessors of REGT in the late 1940s and was
operated until Arkansas Louisiana Gas Company ceased operations of the plant in
the late 1970s.

Beginning about 1985, the predecessors of certain Reliant Energy defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they own or lease. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. As of December
31, 2002, the Company is unable to estimate the monetary damages, if any, that
the plaintiffs may be awarded in these matters.

Manufactured Gas Plant Sites. CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in CERC's Minnesota service territory, two of which
CERC believes were neither owned or operated by CERC, and for which CERC
believes it has no liability.

At March 31, 2003, CERC had accrued $19 million for remediation of the
Minnesota sites. At March 31, 2003, the estimated range of possible remediation
costs was $8 million to $44 million based on remediation continuing for

21

30 to 50 years. The cost estimates are based on studies of a site or industry
average costs for remediation of sites of similar size. The actual remediation
costs will be dependent upon the number of sites to be remediated, the
participation of other potentially responsible parties (PRP), if any, and the
remediation methods used. CERC has utilized an environmental expense tracker
mechanism in its rates in Minnesota to recover estimated costs in excess of
insurance recovery. CERC has collected $12.2 million at March 31, 2003 to be
used for future environmental remediation.

CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for other sites. Recently, the
Company was informed that CERC has been named as a defendant in a third party
complaint in the U.S. District Court for Maine under which contribution is
sought for the cost to remediate a former MGP site in Bangor, Maine. The claim
is based on the previous ownership of the site by a former affiliate of one of
CERC's divisions. CERC has not been served with the complaint and presently is
not aware of details regarding the site, the extent of any legal obligation to
contribute to site remediation or the estimated cost of remediation. Based on
current information, the Company has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.

Mercury Contamination. The Company's pipeline and distribution operations
have in the past employed elemental mercury in measuring and regulating
equipment. It is possible that small amounts of mercury may have been spilled in
the course of normal maintenance and replacement operations and that these
spills may have contaminated the immediate area with elemental mercury. This
type of contamination has been found by the Company at some sites in the past,
and the Company has conducted remediation at these sites. It is possible that
other contaminated sites may exist and that remediation costs may be incurred
for these sites. Although the total amount of these costs cannot be known at
this time, based on experience by the Company and that of others in the natural
gas industry to date and on the current regulations regarding remediation of
these sites, the Company believes that the costs of any remediation of these
sites will not be material to the Company's financial condition, results of
operations or cash flows.

Other Environmental. From time to time the Company has received notices
from regulatory authorities or others regarding its status as a PRP in
connection with sites found to require remediation due to the presence of
environmental contaminants. In addition, the Company has been named as a
defendant in litigation related to such sites and in recent years has been
named, along with numerous others, as a defendant in several lawsuits filed by a
large number of individuals who claim injury due to exposure to asbestos while
working at sites along the Texas Gulf Coast. Most of these claimants have been
workers who participated in construction of various industrial facilities,
including power plants, and some of the claimants have worked at locations owned
by the Company. The Company anticipates that additional claims like those
received may be asserted in the future and intends to continue vigorously
contesting claims which it does not consider to have merit. Although their
ultimate outcome cannot be predicted at this time, the Company does not believe,
based on its experience to date, that these matters, either individually or in
the aggregate, will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.

(c) Department of Transportation.

In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002. This legislation applies to the Company's interstate pipelines as well as
its intra-state pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires companies to assess the integrity of their pipeline transmission and
distribution facilities in areas of high population concentration and further
requires companies to perform remediation activities, in accordance with the
requirements of the legislation, over a 10-year period.

In January 2003, the U.S. Department of Transportation published a notice
of proposed rulemaking to implement provisions of the legislation. The
Department of Transportation is expected to issue final rules by the end of
2003.

While the Company anticipates that increased capital and operating expenses
will be required to comply with the requirements of the legislation, it will not
be able to quantify the level of spending required until the Department of
Transportation's final rules are issued.

22

(d) Other Proceedings.

The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

(e) Nuclear Insurance.

Texas Genco and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property
damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.

Pursuant to the Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $9.3 billion as of March 31, 2003. Owners are
required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners of the
South Texas Project currently maintain the required nuclear liability insurance
and participate in the industry retrospective rating plan.

There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition, results of operations and cash flows.

(f) Nuclear Decommissioning.

Texas Genco contributed $2.9 million in 2002 to trusts established to fund
its share of the decommissioning costs for the South Texas Project, and expects
to contribute $2.9 million in 2003. There are various investment restrictions
imposed upon Texas Genco by the Texas Utility Commission and the United States
Nuclear Regulatory Commission (NRC) relating to Texas Genco's nuclear
decommissioning trusts. Additionally, Texas Genco and CenterPoint Energy have
each appointed two members to the Nuclear Decommissioning Trust Investment
Committee which establishes the investment policy of the trusts and oversees the
investment of the trusts' assets. The securities held by the trusts for
decommissioning costs had an estimated fair value of $158 million as of March
31, 2003, of which approximately 48% were fixed-rate debt securities and the
remaining 52% were equity securities. For a discussion of the accounting
treatment for the securities held in the nuclear decommissioning trust, see Note
3(k) to the CenterPoint Energy Notes, which note is incorporated herein by
reference. In July 1999, an outside consultant estimated Texas Genco's portion
of decommissioning costs to be approximately $363 million. While the funding
levels currently exceed minimum NRC requirements, no assurance can be given that
the amounts held in trust will be adequate to cover the actual decommissioning
costs of the South Texas Project. Such costs may vary because of changes in the
assumed date of decommissioning and changes in regulatory requirements,
technology and costs of labor, materials and equipment. Pursuant to the Texas
electric restructuring law, costs associated with nuclear decommissioning that
have not been recovered as of January 1, 2002, will continue to be subject to
cost-of-service rate regulation and will be included in a charge to transmission
and distribution customers. CenterPoint Energy is contractually obligated to
indemnify Texas Genco from and against any obligations relating to the
decommissioning not otherwise satisfied through collections by CenterPoint
Houston. For information regarding the effect of the business separation plan on
funding of the nuclear decommissioning trust fund, see Note 4(b) to the
CenterPoint Energy Notes, which note is incorporated herein by reference.

(g) "Price to Beat" Clawback Component.

In connection with the implementation of the Texas electric restructuring
law, the Texas Utility Commission has set a "price to beat" that retail electric
providers affiliated or formerly affiliated with a former integrated utility
must charge residential and small commercial customers within their affiliated
electric utility's service area. The true-up provides for a clawback of "price
to beat" in excess of the market price of electricity if 40% of the "price to
beat" load is not served by a non-affiliated retail electric provider by January
1, 2004. Pursuant to the Texas electric

23

restructuring law and the master separation agreement between Reliant Energy and
Reliant Resources, Reliant Resources is obligated to pay CenterPoint Houston for
the clawback component of the true-up. The clawback may not exceed $150 times
the number of customers served by the affiliated retail electric provider in the
transmission and distribution utility's service territory, less the number of
customers served by the affiliated retail electric provider outside the
transmission and distribution utility's service territory, on January 1, 2004.

(13) EARNINGS PER SHARE

The following table presents the Company's basic and diluted earnings per
share (EPS) calculation:

(1) For the three months ended March 31, 2002 and 2003, the computation of
diluted EPS excludes 5,595,200 and 10,249,849 purchase options,
respectively, for shares of common stock that have exercise prices (ranging
from $24.38 to $50.00 per share and $7.86 to $34.17 per share for the first
quarter of 2002 and 2003, respectively) greater than the per share average
market price for the period and would thus be anti-dilutive if exercised.

24

(14) REPORTABLE BUSINESS SEGMENTS

The Company's determination of reportable business segments considers the
strategic operating units under which the Company manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments. The Company has
identified the following reportable business segments: Electric Transmission &
Distribution, Electric Generation, Natural Gas Distribution, Pipelines and
Gathering and Other Operations. Reportable business segments presented herein do
not include Wholesale Energy, European Energy, Retail Energy and related
corporate costs as these business segments operated within Reliant Resources,
which is presented as discontinued operations within these consolidated
financial statements. Additionally, the Company's Latin America operations,
which were previously reported in the Other Operations business segment, are
presented as discontinued operations within these consolidated financial
statements. Reportable business segments for all prior periods presented have
been restated to conform to the 2003 presentation.

The Company evaluates business segment performance on an earnings (loss)
before interest expense, distribution on trust preferred securities, income
taxes, minority interest, extraordinary item and cumulative effect of accounting
change (EBIT) basis. EBIT, as defined, is shown because it is a measure the
Company uses to evaluate the performance of its business segments, and the
Company believes it is a measure of financial performance that may be used as a
means to analyze and compare companies on the basis of operating performance.
The Company expects that some analysts and investors will want to review EBIT
when evaluating the Company. EBIT is not defined under GAAP, should not be
considered in isolation or as a substitute for a measure of performance prepared
in accordance with GAAP and is not indicative of operating income from
operations as determined under GAAP. Additionally, the Company's computation of
EBIT may not be comparable to other similarly titled measures computed by other
companies, because all companies do not calculate it in the same fashion.

Financial data for the Company's reportable business segments are as
follows:

(1) Retail customers remained regulated customers of Reliant Energy HL&P, then
an unincorporated division of Reliant Energy, through the date of their
first meter reading in January 2002. Sales of electricity to retail

25

customers in 2002 prior to this meter reading are reflected in the Electric
Transmission & Distribution business segment.

(2) Sales to subsidiaries of Reliant Resources for the three months ended
March 31, 2002 and 2003 represented approximately $117 million and $212
million, respectively, of CenterPoint Houston's transmission and
distribution revenues since deregulation began in 2002.

(3) Sales to subsidiaries of Reliant Resources for the three months ended
March 31, 2002 and 2003 represented approximately 53% and 68%,
respectively, of Texas Genco's total revenues. Sales to BP Energy for
the three months ended March 31, 2003 represented approximately 10% of
Texas Genco's total revenues.

Reconciliation of Operating Income to EBIT and EBIT to Net Income
Attributable to Common Shareholders:

CenterPoint Energy has entered standard indemnification agreements with
various surety companies to support the issuance of surety bonds on behalf of
CenterPoint Energy and its subsidiaries. These indemnification agreements vary
in duration to coincide with the term of the bonds issued. As of March 31, 2003,
these agreements covered surety bonds in the aggregate amount of $14.1 million.
In addition, CenterPoint Energy has provided $9.6 million in cash deposits to
secure its indemnity to one surety company.

(16) SUBSEQUENT EVENT

During a routine refueling and maintenance outage in early April 2003,
engineers found a small quantity of residue from reactor cooling water in the
South Texas Project Unit 1 reactor containment building. No other residue was
found in Unit 1 or in the plant's twin Unit 2 reactor when it was inspected
during a refueling outage in the fall of 2002. Upon discovery of the residue,
South Texas Project officials immediately reported their findings to the NRC.
The South Texas Project's managers and engineers are conferring with industry
experts to develop a corrective action plan. The NRC must approve any corrective
action plan before it is implemented.

Although Unit 1 was originally scheduled to be returned to service by May
2003, it will remain shut down until any necessary corrective action is
completed. While the unit remains out of service, Texas Genco will meet its
existing power sales obligations from other generating units and/or from
purchases from third parties. A protracted outage at Unit 1 would adversely
affect Texas Genco's operating results. Until inspections are completed and an
acceptable corrective action plan has been developed, Texas Genco is unable to
predict the extent of the economic impact of this outage and when the unit will
be returned to service. Texas Genco does not expect Unit 1 will return to
service before late summer of 2003.

26

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CENTERPOINT ENERGY AND SUBSIDIARIES

The following discussion and analysis should be read in combination with
our Interim Financial Statements contained in this Form 10-Q.

OVERVIEW

We are a public utility holding company, created on August 31, 2002 as part
of a corporate restructuring of Reliant Energy, Incorporated (Reliant Energy) in
compliance with requirements of the Texas electric restructuring law. We are the
successor to Reliant Energy for financial reporting purposes under the
Securities Exchange Act of 1934. Our operating subsidiaries own and operate
electric generation plants, electric transmission and distribution facilities,
natural gas distribution facilities and natural gas pipelines. We are subject to
regulation as a "registered holding company" under the Public Utility Holding
Company Act of 1935 (1935 Act). Our indirect wholly owned subsidiaries include:

We also have an approximately 81% ownership interest in Texas Genco
Holdings, Inc. (Texas Genco), which owns and operates our Texas generating
plants formerly belonging to the integrated electric utility that was a part of
Reliant Energy. We distributed the remaining 19% of the outstanding common stock
of Texas Genco to our shareholders on January 6, 2003.

At the time of Reliant Energy's corporate restructuring, it owned an
83% interest in Reliant Resources, Inc. (Reliant Resources), which conducts
non-utility wholesale and retail energy operations primarily in North America
and Western Europe. On September 30, 2002, we distributed that interest to our
shareholders (the Reliant Resources Distribution).

In this section we discuss our results from continuing operations on a
consolidated basis and individually for each of our business segments. We also
discuss our liquidity, capital resources and critical accounting policies. Our
reportable business segments include the following:

o Electric Transmission & Distribution;

o Electric Generation;

o Natural Gas Distribution;

o Pipelines and Gathering; and

o Other Operations.

Effective with the full deregulation of sales of electric energy to retail
customers in Texas beginning in January 2002, power generators and retail
electric providers in Texas ceased to be subject to traditional cost-based
regulation. Since that date, we have sold generation capacity, energy and
ancillary services related to power generation at prices determined by the
market. Our transmission and distribution services remain subject to rate
regulation. Although our former retail sales business is no longer conducted by
us, retail customers remained regulated customers of our former integrated
electric utility, Reliant Energy HL&P, through the date of their first meter
reading in 2002. Sales of electricity to retail customers in 2002 prior to this
meter reading are reflected in the Electric Transmission & Distribution business
segment. For business segment reporting information, please read Notes 1 and 14
to our Interim Financial Statements.

27

Subsequent to December 31, 2002, we sold our remaining Latin America
operations. The Interim Financial Statements present these Latin America
operations as discontinued operations in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" (SFAS No. 144). Accordingly, the Interim Financial
Statements reflect these operations as discontinued operations for the three
months ended March 31, 2002 and 2003.

The Interim Financial Statements have been prepared to reflect the effect
of the Reliant Resources Distribution on the CenterPoint Energy financial
statements. The Interim Financial Statements present the Reliant Resources
businesses (previously reported as Wholesale Energy, European Energy and Retail
Energy business segments and related corporate costs) as discontinued
operations, in accordance with SFAS No. 144. Accordingly, the Interim Financial
Statements include the necessary reclassifications to reflect these operations
as discontinued operations for the three months ended March 31, 2002.

RECENT DEVELOPMENTS

During a routine refueling and maintenance outage in early April 2003,
engineers found a small quantity of residue from reactor cooling water in the
South Texas Project Electric Generating Station (South Texas Project) Unit 1
reactor containment building. No other residue was found in Unit 1 or in the
plant's twin Unit 2 reactor when it was inspected during a refueling outage in
the fall of 2002. Upon discovery of the residue, South Texas Project officials
immediately reported their findings to the Nuclear Regulatory Commission (NRC).
The South Texas Project's managers and engineers are conferring with industry
experts to develop a corrective action plan. The NRC must approve any corrective
action plan before it is implemented.

Although Unit 1 was originally scheduled to be returned to service by May
2003, it will remain shut down until any necessary corrective action is
completed. While the unit remains out of service, Texas Genco will meet its
existing power sales obligations from other generating units and/or from
purchases from third parties. A protracted outage at Unit 1 would adversely
affect Texas Genco's operating results. Until inspections are completed and an
acceptable corrective action plan has been developed, Texas Genco is unable to
predict the extent of the economic impact of this outage and when the unit will
be returned to service. Texas Genco does not expect Unit 1 (Texas Genco's share
is 385 MW) will return to service before late summer of 2003. In order to
mitigate the financial impact of forced outages at its generating units, Texas
Genco does not auction 750 MW of coal and lignite base-load capacity and 500 MW
of gas-fired capacity. However, nuclear generation from the South Texas Project
is Texas Genco's least expensive source of power because the cost of nuclear
fuel is substantially less than that of coal, lignite or natural gas.
Accordingly, while Unit 1 is shut down, Texas Genco will be required to satisfy
capacity entitlements with significantly more expensive power and its ability
to make opportunity sales and serve gas auction entitlements from South Texas
Project production will be reduced. For example, Texas Genco's base-load
capacity generally operates at an approximate energy cost of between $16/Mwh and
$17/Mwh and gas fired capacity ranges between $55/Mwh and $60/Mwh based on
current natural gas prices, while its nuclear generation capacity generally
operates at an approximate energy cost of between $4/Mwh and $5/Mwh.

The following discussion of consolidated results of operations and results
of operations by business segment is based on earnings from continuing
operations before interest expense, distribution on trust preferred securities,
income taxes, minority interest and cumulative effect of accounting change
(EBIT). EBIT, as defined, is shown because it is a financial measure we use to
evaluate the performance of our business segments and we believe it is a measure
of financial performance that may be used as a means to analyze and compare
companies on the basis of operating performance. We expect that some analysts
and investors will want to review EBIT when evaluating our company. EBIT is not
defined under accounting principles generally accepted in the United States
(GAAP), should not be considered in isolation or as a substitute for a measure
of performance prepared in accordance with GAAP and is not indicative of
operating income from operations as determined under GAAP. Additionally, our
computation of EBIT may not be comparable to other similarly titled measures
computed by other companies, because all companies do not calculate it in the
same fashion. We consider operating income to be a comparable measure under
GAAP. We believe the difference between operating income and EBIT on both a
consolidated and business segment basis is not material. We have provided a
reconciliation of consolidated operating income to EBIT and EBIT to net income
below as well as in the individual business segment discussion that follows.

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Income from Continuing Operations. We reported income from continuing
operations before cumulative effect of accounting change of $81 million ($0.27
per diluted share) for the three months ended March 31, 2003 as compared to $145
million ($0.49 per diluted share) for the same period in 2002. The decrease in
income from continuing operations of $64 million was primarily due to the
following:

o a $106 million increase in interest expense due to higher borrowing
costs and increased debt levels; and

o a $45 million decrease in EBIT from our Electric Transmission &
Distribution business segment.

The above items were partially offset by:

o a $35 million increase in EBIT from our Electric Generation business
segment;

o a $24 million increase in EBIT from our Natural Gas Distribution
business segment; and

o a $27 million decrease in income tax expense.

The derivation of the foregoing EBIT and its reconciliation to Operating
Income is provided in the discussion of our business segments that follows.

Income Tax Expense. During the three months ended March 31, 2003 and 2002,
our effective tax rates were 33.2% and 31.9%, respectively. The increase in the
effective tax rate for the first quarter of 2003 compared to the first quarter
of 2002 was primarily the result of an increase in state taxes and a decrease in
benefits related to the employee stock ownership plan, offset by a decrease in
pretax income which amplified the effect of the permanent items on our effective
tax rate.

Cumulative Effect of Accounting Change. In connection with the adoption of
SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143), we
have completed an assessment of the applicability and implications of SFAS No.
143. As a result of the assessment, we have identified retirement obligations
for nuclear decommissioning at the South Texas Project and for lignite mine
operations at the Jewett mine supplying the Limestone electric generation
facility. The net difference between the amounts determined under SFAS No. 143
and the previous method of accounting for estimated mine reclamation costs was
$37 million and has been

30

recorded as a cumulative effect of accounting change. Upon adoption of SFAS No.
143, we reversed $115 million of previously recognized removal costs with
respect to our non-rate regulated businesses as a cumulative effect of
accounting change. The total cumulative effect of accounting change from
adoption of SFAS No, 143 was $152 million. Excluded from the $80 million
after-tax cumulative effect of accounting change recorded for the three months
ended March 31, 2003, is minority interest of $19 million related to the Texas
Genco stock not owned by CenterPoint Energy. For additional discussion of the
adoption of SFAS No. 143, please read Note 3 to our Interim Financial
Statements.

EARNINGS BEFORE INTEREST AND INCOME TAXES BY BUSINESS SEGMENT

The following table presents EBIT for each of our business segments for the
three months ended March 31, 2002 and 2003. Some amounts from the previous year
have been reclassified to conform to the 2003 presentation of the financial
statements. These reclassifications do no affect consolidated net income.

Our Electric Transmission & Distribution business segment reported EBIT of
$214 million for the three months ended March 31, 2003, consisting of $82
million for the regulated electric transmission & distribution utility and
non-cash EBIT of $132 million associated with generation-related regulatory
assets, or Excess Cost Over Market (ECOM), as described below. For the three
months ended March 31, 2002, EBIT was $259 million, consisting of $104 million
for the regulated electric transmission & distribution utility, non-cash EBIT of
$141 associated with ECOM, and $14 million related to the transition to the
deregulated electric market. Although our former retail sales business is no
longer conducted by us, retail customers remained regulated customers of the
regulated utility through the date of their first meter reading in 2002. The
purchased power costs of $60 million for the three months ended March 31, 2002
relate to operation of the regulated utility during this transition period.

Under the Texas electric restructuring law, a regulated utility may
recover, in its 2004 stranded cost true-up proceeding, any difference between
market prices received through the state mandated auctions and the Texas Utility
Commission's earlier estimates of those market prices. During 2002 and 2003,
this difference, referred to as ECOM, produces non-cash EBIT and is recorded as
a regulatory asset. The reduction in ECOM of $9 million from 2002 to 2003
resulted from an increase in capacity auction prices at Texas Genco.

Operation and maintenance expense decreased $8 million for the three months
ended March 31, 2003 as compared to the same period in 2002. The decrease was
primarily due to a reduction in bad debt expense of $17 million related to the
2002 transition period (bundled) revenues ($14 million) and the termination of a
factoring program ($3 million). This decrease in bad debt expense was partially
offset by increased employee benefit expenses primarily due to increased pension
costs ($5 million) and increased insurance expenses ($3 million).

32

Depreciation and amortization expense increased $2 million for the three
months ended March 31, 2003 as compared to the same period in 2002 primarily due
to increases in plant in service ($4 million) partially offset by decreased
amortization on securitized assets ($2 million).

Taxes other than income taxes decreased $6 million for the three months
ended March 31, 2003 as compared to the same period in 2002 primarily due to
gross receipts tax associated with transition period revenue in the first
quarter of 2002.

ELECTRIC GENERATION

For information regarding factors that may affect the future results of
operations of our Electric Generation business segment, please read "Business --
Risk Factors -- Risk Factors Affecting the Results of Our Electric Generation
Business" in Item 1 of the CenterPoint Energy Form 10-K, which is incorporated
herein by reference.

The following tables provide summary data, including Loss Before Interest
and Income Taxes, of our Electric Generation business segment for the three
months ended March 31, 2002 and 2003:

Our Electric Generation business segment's loss before interest and income
taxes for the three months ended March 31, 2003 was $17 million compared to a
loss before interest and income taxes of $52 million for the same period in
2002. The improvement is primarily attributable to increased gross margins as a
result of higher capacity auction prices driven by higher gas prices, partially
offset by increased operation and maintenance expenses due to unplanned forced
outages in the first quarter of 2003 and higher property insurance expense. The
first quarter is typically Texas Genco's lowest performing quarter due to
seasonal revenue effects and the scheduling of planned maintenance on its
generating units. South Texas Project Unit 2 was taken out of service in
December 2002 as a result of non-safety related mechanical failures and was
returned to service on March 14, 2003. The added cost of replacement energy
negatively impacted gross margin by approximately $23 million for the first
quarter of 2003.

Operation and maintenance expense increased $10 million for the three
months ended March 31, 2003 as compared to the same period in 2002 primarily due
to the Unit 2 outage discussed above ($4 million), a scheduled re-fueling outage
on Unit 1 ($2 million) and higher property insurance expense ($1 million).

Taxes other than income taxes decreased $2 million for the three months
ended March 31, 2003 as compared to the same period in 2002. This decrease was
attributable to a reduction in property taxes.

33

NATURAL GAS DISTRIBUTION

Our Natural Gas Distribution business segment's operations consist of
intrastate natural gas sales to, and natural gas transportation for residential,
commercial and industrial customers in Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas. This business segment's operations also include
non-rate regulated natural gas sales to and transportation services for
commercial and industrial customers in the six states listed above as well as
several other Midwestern states.

For information regarding factors that may affect the future results of
operations of our Natural Gas Distribution business segment, please read
"Business -- Risk Factors -- Risk Factors Affecting the Results of Our Natural
Gas Distribution and Pipelines and Gathering Businesses" in Item 1 of the
CenterPoint Energy Form 10-K, which is incorporated herein by reference.

The following table provides summary data, including EBIT, of our Natural
Gas Distribution business segment for the three months ended March 31, 2002 and
2003:

Our Natural Gas Distribution business segment's EBIT increased $24 million
for the three months ended March 31, 2003 as compared to the same period in
2002. Operating margins (revenues less fuel costs) for the three months ended
March 31, 2003 were $56 million higher than in the same period in 2002 primarily
because of:

These increases were partially offset by increased operating expenses as
discussed below.

Operations and maintenance expense increased $16 million for the three
months ended March 31, 2003 as compared to the same period in 2002. The increase
in operations and maintenance expense was primarily due to:

o certain costs being included in operating expense subsequent to the
amendment of a receivables facility in November 2002 as compared with
being included in interest expense in the prior year ($4 million);

Depreciation and amortization expense increased approximately $3 million
for the three months ended March 31, 2003 as compared to the same period in 2002
primarily as a result of increases in plant in service.

Taxes other than income taxes increased $13 million for the three months
ended March 31, 2003 as compared to the same period in 2002, primarily due to
increased franchise fees resulting from higher revenues ($11 million).

For information regarding factors that may affect the future results of
operations of our Pipelines and Gathering business segment, please read
"Business -- Risk Factors -- Risk Factors Affecting the Results of Our Natural
Gas Distribution and Pipelines and Gathering Businesses" in Item 1 of the
CenterPoint Energy Form 10-K, which is incorporated herein by reference.

The following table provides summary data, including EBIT, of our Pipelines
and Gathering business segment for the three months ended March 31, 2002 and
2003:

Our Pipelines and Gathering business segment's EBIT for the three months
ended March 31, 2003 compared to the same period in 2002, increased $7 million.
Operating margins were $3 million higher for the three months ended March 31,
2003 than in the same period in 2002 primarily due to increased margins
resulting from higher gas and liquid commodity prices ($9 million), which were
partially offset by reduced project related revenues ($5 million).

Operation and maintenance expenses decreased $4 million for the three
months ended March 31, 2003 compared to the same period in 2002 primarily due to
a decrease in project related costs ($5 million), partially offset by an
increase in employee benefit expenses primarily due to increased pension costs
($1 million).

35

Depreciation and amortization expense increased $1 million for the three
months ended March 31, 2003, as compared to the same period in 2002 primarily as
a result of increases in plant in service.

OTHER OPERATIONS

Our Other Operations business segment includes district cooling operations
in the central business district in downtown Houston, energy management services
and other corporate operations which support all of our business operations.

The following table shows EBIT of our Other Operations business segment for
the three months ended March 31, 2002 and 2003:

Our Other Operations business segment's loss before interest and income
taxes decreased by $3 million for the three months ended March 31, 2003 compared
to the same period in 2002. The decline for the three months was primarily due
to a net loss of $6 million in 2003 as compared to a net loss of $14 million in
2002 on our AOL Time Warner investment and related indexed debt securities,
partially offset by an increase in unallocated corporate costs and corporate
accruals.

DISCONTINUED OPERATIONS

In February 2003, we sold our interest in Argener, a cogeneration facility
in Argentina, for $23.1 million. The carrying value of this investment was
approximately $11 million as of December 31, 2002. We recorded an after-tax gain
of $7 million from the sale of Argener in the first quarter of 2003. We have
completed our strategy of exiting Latin America. The Interim Financial
Statements present these Latin America operations as discontinued operations in
accordance with SFAS No. 144 for the three months ended March 31, 2002 and 2003.

On September 30, 2002, we distributed to our shareholders on a pro rata
basis all of the shares of Reliant Resources common stock owned by us. The
Interim Financial Statements have been prepared to reflect the effect of the
Reliant Resources Distribution as described above on our Interim Financial
Statements. The Interim Financial Statements present the Reliant Resources
businesses (Wholesale Energy, European Energy, Retail Energy and related
corporate costs) as discontinued operations for the three months ended March 31,
2002. We recorded an after-tax loss from discontinued operations of $113 million
for the three months ended March 31, 2002 related to the operations of Reliant
Resources.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

For information on other developments, factors and trends that may have an
impact on our future earnings, please read "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors Affecting
Future Earnings" in Exhibit 99.1 to our Current Report on Form 8-K dated May 12,
2003 (May 12 Form 8-K), which is incorporated herein by reference.

In addition to the factors incorporated by reference from the May 12
Form 8-K, increased borrowing costs and increased pension expense are expected
to negatively impact our earnings in 2003. Additionally, please read the
discussion of the South Texas Project Unit 1 forced outage under
"-- Overview -- Recent Developments."

36

LIQUIDITY AND CAPITAL RESOURCES

HISTORICAL CASH FLOWS

The following table summarizes the net cash provided by (used in)
operating, investing and financing activities for the three months ended March
31, 2002 and 2003:

Net cash provided by operating activities during the three months ended
March 31, 2003 increased $196 million compared to the same period in 2002
primarily due to increased accounts payable, partially offset by decreased
accrued taxes and interest and increases in net regulatory assets.

Net cash used in investing activities decreased $45 million during the
three months ended March 31, 2003 compared to the same period in 2002 primarily
due to lower capital expenditures in 2003.

Net cash provided by financing activities decreased $271 million during the
three months ended March 31, 2003 compared to the same period in 2002 primarily
due a decrease in short-term borrowings, partially offset by an increase in net
proceeds from long-term debt.

On February 28, 2003, we reached agreement with a syndicate of banks on a
second amendment to our $3.85 billion bank facility (Second Amendment). Under
the Second Amendment, the maturity date of the bank facility was extended from
October 2003 to June 30, 2005, and the $1.2 billion in mandatory prepayments
that would have been required in 2003 (including $600 million due on February
28, 2003) were eliminated. At the time of the Second Amendment, the facility
consisted of a $2.35 billion term loan and a $1.5 billion revolver. In March
2003, a $50 million repayment of the term loan reduced the term loan to $2.30
billion. The revolver was fully utilized on March 31, 2003. Borrowings bear
interest based on the London interbank offered rate (LIBOR) under a pricing grid
tied to our credit rating. At our current credit ratings, the pricing for loans
remains the same. The drawn cost at our current ratings is LIBOR plus 450 basis
points. We have agreed to pay the banks an extension fee of 75 basis points on
the amounts outstanding under the bank facility on October 9, 2003. We also paid
$41 million in fees that were due on February 28, 2003, along with $20 million
in fees that had been due on June 30, 2003.

In addition, the interest rate will be increased by 25 basis points
beginning May 28, 2003 if we do not grant the banks a security interest in our
81% stock ownership of Texas Genco. Granting the security interest in the stock
of Texas Genco requires approval from the Securities and Exchange Commission
(SEC) under the 1935 Act, which is currently being sought. That security
interest would be released at the time of a sale of Texas Genco, which may occur
as early as 2004. Proceeds from any sale will be used to reduce the bank
facility.

Also under the Second Amendment, on or before May 28, 2003, we agreed to
grant to the banks warrants to purchase up to 10%, on a fully diluted basis, of
our common stock at a price equal to the greater of $6.56 per share or 110% of
the closing price on the New York Stock Exchange on the date the warrants are
issued. The warrants would not be exercisable for a year after issuance but
would remain outstanding for four years; provided, that if we reduce the term
loans owed under the bank facility during 2003 by specified amounts, the
warrants will be extinguished. To the extent that we reduce the term loans owed
under the bank facility by up to $400 million on or before May 28, 2003, up to
half of the warrants will be extinguished on a basis proportionate to the
reduction in the credit facility. To the extent such warrants are not
extinguished on or before May 28, 2003, they will vest and become exercisable in
accordance with their terms. At

37

March 31, 2003, we had reduced the term loans owed under the bank facility by
$50 million. Whether or not we are able to extinguish warrants on or before May
28, 2003, the remaining 50% of the warrants will be extinguished, again on a
proportionate basis, if we reduce the term loans owed under the bank facility by
up to $400 million by the end of 2003. We plan to eliminate the warrants
entirely before they vest by accessing the capital markets to fund the total
payments of $800 million during 2003; however there can be no assurance that we
will be able to extinguish the warrants or to do so on favorable terms.

The warrants and the underlying common stock would be registered with the
SEC and could be exercised either through the payment of the purchase price or
on a "cashless" basis under which we would issue a number of shares based upon
the difference between the then-current market price and the warrant exercise
price. Issuance of the warrants is also subject to obtaining SEC approval under
the 1935 Act, which is currently being sought. If that approval is not obtained
on or before May 28, 2003, we will provide the banks equivalent cash
compensation over the term that our warrants would have been exercisable to the
extent they are not otherwise extinguished.

In the Second Amendment, we also agreed that our quarterly common stock
dividend will not exceed $0.10 per share. If we have not reduced the bank
facility by a total of at least $400 million by the end of 2003, of which at
least $200 million has come from the issuance of capital stock or securities
linked to capital stock (such as convertible debt), the maximum dividend payable
during 2004 and for the balance of the term of the facility is subject to an
additional test. Under that test the maximum permitted quarterly dividend will
be the lesser of (i) $0.10 per share or (ii) 12.5% of our net income per share
for the 12 months ended on the last day of the previous quarter.

The Second Amendment provides that proceeds from capital stock or
indebtedness issued or incurred by us must be applied (subject to a $200 million
basket for CERC and another $250 million basket for borrowings by us, certain
permitted refinancings of existing debt and other limited exceptions) to repay
bank loans and permanently reduce the bank facility. Similarly, cash proceeds
from the sale of assets of more than $30 million or, if less, a group of sales
aggregating more than $100 million, must be applied to repay bank loans and
reduce the bank facility, except that proceeds of up to $120 million can be
reinvested in our businesses.

On March 18, 2003, CenterPoint Houston issued $762.3 million aggregate
principal amount of general mortgage bonds composed of $450 million principal
amount of 10-year bonds with an interest rate of 5.7% and $312.3 million
principal amount of 30-year bonds with an interest rate of 6.95%. Proceeds were
used to repay $150 million aggregate principal amount of medium-term notes
maturing on April 21, 2003, to redeem approximately $312.3 million aggregate
principal amount of CenterPoint Houston's first mortgage bonds and to repay $279
million of a $537 million intercompany note payable to CenterPoint Energy by
CenterPoint Houston. Proceeds from the note repayment were ultimately used to
repay borrowings under our $3.85 billion credit facility and to permanently
reduce the term loan component of the credit facility by $50 million.

On March 25 and April 14, 2003, CERC issued $650 million and $112 million,
respectively, aggregate principal amount of 7.875% senior unsecured notes due in
2013. A portion of the proceeds were used to refinance $360 million aggregate
principal amount of CERC's 6 3/8% Term Enhanced ReMarketable Securities (TERM
Notes) and to pay costs associated with the refinancing. Proceeds were also used
to repay borrowings under CERC's $350 million revolving credit facility prior to
its expiration on March 31, 2003. The remaining $140 million aggregate principal
amount of TERM Notes are due to be refinanced or remarketed in November 2003.

On April 9, 2003, we remarketed $175 million aggregate principal amount of
pollution control bonds that we had owned since the fourth quarter of 2002.
Remarketed bonds maturing in 2029 have a principal amount of $75 million and an
interest rate of 8%. Remarketed bonds maturing in 2018 have a principal amount
of $100 million and an interest rate of 7.75%. Proceeds from the remarketing
were used to repay bank debt. We are obligated to make payments sufficient to
service the pollution control bonds.

In addition to the $140 million of TERM Notes, remaining maturities in 2003
include $16.6 million principal amount of pollution control bonds and $12
million of expected maturities of transition bonds which are discussed below.

We have $840 million of outstanding 2.0% Zero-Premium Exchangeable
Subordinated Notes due 2029 (ZENS) that may be exchanged for cash at any time.
Holders of ZENS submitted for exchange are entitled to receive a cash payment
equal to 95% of the market value of the reference shares of AOL Time Warner
common stock (AOL TW Common). There are 1.5 reference shares of AOL TW Common
for each of the 17.2 million ZENS units originally issued (of which
approximately 16% were exchanged for cash of approximately $45 million in 2002).
The exchange

38

market value is calculated using the average closing price per share of AOL TW
Common on the New York Stock Exchange on one or more trading days following the
notice date for the exchange. One of our subsidiaries owns the reference shares
of AOL TW Common and generally liquidates such holdings to the extent of ZENS
exchanged. Cash proceeds from such liquidations are used to fund ZENS exchanged
for cash. Although proceeds from the sale of AOL TW Common offset the cash paid
on exchanges, ZENS exchanges result in a cash outflow because deferred tax
liabilities related to the ZENS and AOL TW Common become current tax obligations
when ZENS are exchanged and AOL TW Common is sold. There have been no exchanges
in 2003.

CenterPoint Houston has outstanding approximately $699 million aggregate
principal amount of first mortgage bonds and approximately $2.6 billion
aggregate principal amount of general mortgage bonds, of which approximately
$924 million combined aggregate principal amount of first mortgage bonds and
general mortgage bonds collateralizes debt of CenterPoint Energy. The general
mortgage bonds are issued under the General Mortgage Indenture dated as of
October 10, 2002. The lien of the general mortgage indenture is junior to that
of the Mortgage, pursuant to which the first mortgage bonds are issued. The
aggregate amount of additional general mortgage bonds and first mortgage bonds
that could be issued is approximately $600 million based on estimates of the
value of property encumbered by the general mortgage, the cost of such property
and the 70% bonding ratio contained in the general mortgage. As a result of
contractual limitations expiring in November 2005, the aggregate amount of first
mortgage and general mortgage bonds cannot be increased above current levels.

One of our indirect finance subsidiaries, CenterPoint Energy Transition
Bond Company, LLC, has $729 million aggregate principal amount of outstanding
transition bonds that were issued in 2001 in accordance with the Texas electric
restructuring law. Classes of the transition bonds have final maturity dates of
September 15, 2007, September 15, 2009, September 15, 2011 and September 15,
2015 and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%, respectively.
The transition bonds are secured by "transition property," as defined in the
Texas electric restructuring law, which includes the irrevocable right to
recover, through non-bypassable transition charges payable by retail electric
customers, qualified costs provided in the Texas electric restructuring law. The
transition bonds are reported as our long-term debt, although the holders of the
transition bonds have no recourse to any of our assets or revenues, and our
creditors have no recourse to any assets or revenues (including, without
limitation, the transition charges) of the transition bond company. CenterPoint
Houston has no payment obligations with respect to the transition bonds except
to remit collections of transition charges as set forth in a servicing agreement
between CenterPoint Houston and the transition bond company and in an
intercreditor agreement among CenterPoint Houston, our indirect transition bond
subsidiary and other parties.

On February 28, 2003, our $3.85 billion bank facility was amended and
extended to June 2005 as discussed above in " -- Long-Term Debt." Loans under
this facility are recorded as long-term debt in the Consolidated Balance Sheets
at both December 31, 2002 and March 31, 2003.

On March 25, 2003, CERC obtained a $200 million revolving credit facility
that terminates on March 23, 2004. Rates for borrowings under this facility,
including the facility fee, are LIBOR plus 250 basis points based on current
credit ratings and the applicable pricing grid.

On March 31, 2003, we had $279 million of temporary investments.

Refunds to CenterPoint Houston Customers. An order issued by the Texas
Utility Commission on October 3, 2001 established the transmission and
distribution rates that became effective in January 2002. The Texas Utility
Commission determined that CenterPoint Houston had overmitigated its stranded
costs by redirecting transmission

39

and distribution depreciation and by accelerating depreciation of generation
assets (an amount equal to earnings above a stated overall rate of return on
rate base that was used to recover our investment in generation assets) as
provided under the 1998 transition plan and the Texas electric restructuring
law. In this final order, CenterPoint Houston is required to reverse the amount
of redirected depreciation and accelerated depreciation taken for regulatory
purposes as allowed under the transition plan and the Texas electric
restructuring law. Per the October 3, 2001 order, CenterPoint Houston recorded a
regulatory liability to reflect the prospective refund of the accelerated
depreciation. CenterPoint Houston began refunding excess mitigation credits with
the January 2002 unbundled bills, to be refunded over a seven-year period. The
annual refund of excess earnings is approximately $237 million. Under the Texas
electric restructuring law, a final determination of these stranded costs will
occur in 2004.

Cash Requirements in 2003. Our liquidity and capital requirements are
affected primarily by our results of operations, capital expenditures, debt
service requirements, and working capital needs.

On April 30, 2003 we had no temporary investments and unutilized capacity
of $657 million under our bank facilities and receivables facility.

Our principal remaining cash requirements during 2003 include the following:

o approximately $543 million of capital expenditures;

o an estimated $185 million which we are obligated to return to
customers as a result of the Texas Utility Commission's findings
of over-mitigation of stranded costs;

o remarketing or refinancing of $140 million of CERC Corp. debt,
plus the possible payment of option termination costs, which will
be determined at the time of remarketing or refinancing
(estimated to be $18.2 million as of March 31, 2003) as discussed
in "Quantitative and Qualitative Disclosures About Market Risk --
Interest Rate Risk" in Item 3 of this report;

o dividend payments on CenterPoint Energy common stock; and

o $29 million of maturing long-term debt.

We expect to meet our capital requirements through cash flows from
operations, short-term borrowings and proceeds from debt and/or equity
offerings. We believe that our current liquidity, along with anticipated cash
flows from operations and proceeds from short-term borrowings, including the
renewal, extension or replacement of existing bank facilities, and anticipated
sales of securities in the capital markets will be sufficient to meet our cash
needs. However, the mandatory prepayments required under our $3.85 billion bank
facility and disruptions in our ability to access the capital markets on a
timely basis could adversely affect our liquidity. Limits on our ability to
issue secured debt, as described in this report, may adversely affect our
ability to issue debt securities. Please read "Business -- Risk Factors -- Risk
Factors Associated with Financial Condition and Other Risks -- If we are unable
to arrange future financings on acceptable terms, our ability to fund future
capital expenditures and refinance existing indebtedness could be limited" in
Item 1 of the CenterPoint Energy 10-K, which is incorporated herein by
reference.

At March 31, 2003, CenterPoint Energy had a shelf registration statement
for 15 million shares of common stock and CERC Corp. had a shelf registration
statement covering $50 million of debt securities. The amount of any debt
security or any security having equity characteristics that we can issue,
whether registered or unregistered, or whether debt is secured or unsecured, is
expected to be affected by the market's perception of our creditworthiness,
general market conditions and factors affecting our industry. Proceeds from the
sales of securities are expected to be used primarily to refinance debt.

40

Principal Factors Affecting Cash Requirements in 2004 and 2005. We
anticipate selling our 81% ownership interest in Texas Genco in 2004. Should
Reliant Resources decline to exercise its option to purchase our interest in
Texas Genco, we will explore other alternatives to monetize Texas Genco's
assets, including possible sale of our ownership interest in Texas Genco or of
its individual generating assets, which may significantly affect the timing of
any cash proceeds. Proceeds from that sale, plus proceeds from the
securitization in 2004 or 2005 of stranded costs related to generating assets of
Texas Genco and generation related regulatory assets, are expected to aggregate
in excess of $5 billion.

We expect to issue securitization bonds in 2004 or 2005 to monetize and
recover the balance of stranded costs relating to electric generation assets and
other qualified costs as determined in the 2004 True-Up Proceeding. The issuance
will be done pursuant to a financing order to be issued by the Texas Utility
Commission. As with the debt of our existing transition bond company, payments
on these new securitization bonds would also be made from funds obtained through
non-bypassable charges assessed to retail electric customers required to take
delivery service from CenterPoint Houston. The holders of the securitization
bonds would not have recourse to any of our assets or revenues, and our
creditors would not have recourse to any assets or revenues of the entity
issuing the securitization bonds. All or a portion of the proceeds from the
issuance of securitization bonds remaining after repayment of CenterPoint
Houston's $1.3 billion collateralized term loan are expected to be utilized to
retire other existing debt.

Impact on Liquidity of a Downgrade in Credit Ratings. As of May 1, 2003,
Moody's Investors Service, Inc. (Moody's), Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had
assigned the following credit ratings to senior debt of CenterPoint Energy and
certain subsidiaries:

(1) A "negative" outlook from Moody's reflects concerns over the next 12 to 18
months which will either lead to a review for a potential downgrade or a
return to a stable outlook. A "stable outlook" from Moody's indicates that
Moody's does not expect to put the rating on review for an upgrade or
downgrade within 18 months from when the outlook was assigned or last
affirmed.

(2) A "stable" outlook from S&P indicates that the rating is not likely to
change over the intermediate to longer term.

(3) A "stable" outlook from Fitch indicates the direction a rating is likely to
move over a one- to two-year period.

We cannot assure you that these ratings will remain in effect for any given
period of time or that one or more of these ratings will not be lowered or
withdrawn entirely by a rating agency. We note that these credit ratings are not
recommendations to buy, sell or hold our securities and may be revised or
withdrawn at any time by the rating agency. Each rating should be evaluated
independently of any other rating. Any future reduction or withdrawal of one or
more of our credit ratings could have a material adverse impact on our ability
to obtain short- and long-term financing, the cost of such financings and the
execution of our commercial strategies.

A decline in credit ratings would increase facility fees and borrowing costs
under our existing bank credit facilities. A decline in credit ratings would
also increase the interest rate on long-term debt to be issued in the capital
markets and would negatively impact our ability to complete capital market
transactions.

Our bank facilities contain "material adverse change" clauses that could
impact our ability to make new borrowings under these facilities. The "material
adverse change" clauses in our bank facilities generally relate to an event,
development or circumstance that has or would reasonably be expected to have a
material adverse effect on (a) the business, financial condition or operations
of the borrower and its subsidiaries taken as a whole, or (b) the

41

legality, validity or enforceability of the loan documents.

The $150 million receivables facility of CERC requires the maintenance of
credit ratings of at least BB from S&P and Ba2 from Moody's. Receivables would
cease to be sold in the event a credit rating fell below the threshold.

Each ZENS note is exchangeable at the holder's option at any time for an
amount of cash equal to 95% of the market value of the reference shares of AOL
TW Common attributable to each ZENS note. If our creditworthiness were to drop
such that ZENS note holders thought our liquidity was adversely affected or the
market for the ZENS notes were to become illiquid, some ZENS holders might
decide to exchange their ZENS for cash. Funds for the payment of cash upon
exchange could be obtained from the sale of the AOL TW Common that we own or
from other sources. We own shares of AOL TW Common equal to 100% of the
reference shares used to calculate our obligation to the holders of the ZENS
notes. ZENS exchanges result in a cash outflow because deferred tax liabilities
related to the ZENS and AOL TW Common become current tax obligations when ZENS
are exchanged and AOL TW Common is sold.

CenterPoint Energy Gas Resources Corp., a wholly owned subsidiary of CERC
Corp., provides comprehensive natural gas sales and services to industrial and
commercial customers who are primarily located within or near the territories
served by our pipelines and distribution subsidiaries. In order to hedge its
exposure to natural gas prices, CenterPoint Energy Gas Resources Corp. has
agreements with provisions standard for the industry that establish credit
thresholds and require a party to provide additional collateral on two business
days' notice when that party's rating or the rating of a credit support provider
for that party (CERC Corp. in this case) falls below those levels. As of May 1,
2003, the senior unsecured debt of CERC Corp. was rated BBB by S&P and Ba1 by
Moody's. Based on these ratings, we estimate that unsecured credit limits
extended to CenterPoint Energy Gas Resources Corp. by counterparties could
aggregate $39 million; however, utilized credit capacity is significantly lower.

Cross Defaults. Under our bank facility, a payment default by us or any of
our significant subsidiaries on any indebtedness exceeding $50 million will
cause a default. A default by CenterPoint Energy would not trigger a default
under our subsidiaries' debt instruments.

Pension Plan. As discussed in Note 11 of the notes to the consolidated
financial statements in the May 12 Form 8-K (CenterPoint Energy Notes), which is
incorporated herein by reference, we maintain a non-contributory pension plan
covering substantially all employees. At December 31, 2002, the projected
benefit obligation exceeded the market value of plan assets by $496 million. We
are not required and do not anticipate making any contributions to our pension
plans prior to 2004. Changes in interest rates and the market values of the
securities held by the plans during 2003 could materially, positively or
negatively, change our underfunded status and affect the level of pension
expense and required contributions in 2004 and beyond. For example, every .5%
difference in our actual 2003 asset returns versus our assumed 9% long-term
asset return rate would increase or decrease the underfunded status of our plans
by approximately $5 million and our 2004 pension expense by approximately $1
million. Similarly, a .5% change in the discount rate used to value pension
liabilities at December 31, 2003, could increase or decrease the underfunded
status of our plans by approximately $100 million and 2004 pension expense by
approximately $14 million. Actual investment returns and changes in the discount
rate during 2003 will have no effect on our 2003 pension expense. Additionally,
we expect that a separate pension plan will be established for Texas Genco in
2004. Texas Genco would receive an allocation of assets from the CenterPoint
Energy pension plan pursuant to rules and regulations under the Employee
Retirement Income Security Act of 1974 and record its pension obligations in
accordance with SFAS 87, "Employer's Accounting for Pensions". It is anticipated
that a plan established for Texas Genco would be underfunded and that such
underfunding could be significant. Changes in interest rates and the market
values of the securities held by the CenterPoint Energy pension plan during 2003
could materially, positively or negatively, change the funding status of a plan
established for Texas Genco.

Other Factors that Could Affect Cash Requirements. In addition to the above
factors, our liquidity and capital resources could be affected by:

o the need to provide cash collateral in connection with certain
contracts;

o acceleration of payment dates on certain gas supply contracts under
certain circumstances, as a result of increased gas prices and
concentration of suppliers;

42

o increased costs related to the acquisition of gas for storage;

o increases in interest expense in connection with debt refinancings;

o various regulatory actions; and

o the ability of Reliant Resources and its subsidiaries to satisfy their
obligations as the principal customers of CenterPoint Houston and
Texas Genco and in respect of its indemnity obligations to us.

Money Pool. We have a "money pool" through which we and our participating
subsidiaries can borrow or invest on a short-term basis. Funding needs are
aggregated and external borrowing or investing is based on the net cash
position. The money pool's net funding requirements are expected to be met with
bank loans. The terms of the money pool are in accordance with requirements
applicable to registered public utility holding companies under the 1935 Act.

Capitalization. Factors affecting our capitalization include:

o covenants and other provisions in our and our subsidiaries' bank
facilities and other borrowing agreements; and

o limitations imposed on us as a registered public utility holding
company.

The collateralized term loan of CenterPoint Houston limits CenterPoint
Houston's debt, excluding transition bonds, as a percentage of its total
capitalization to 68%. CERC Corp.'s bank facility and its receivables facility
limit CERC's debt as a percentage of its total capitalization to 60% and contain
an earnings before interest, taxes, depreciation and amortization (EBITDA) to
interest covenant. CERC Corp.'s bank facility also contains a provision that
could, under certain circumstances, limit the amount of dividends that could be
paid by CERC Corp. Our $3.85 billion credit agreement limits dividend payments
as described above, contains a debt to EBITDA covenant, an EBITDA to interest
covenant and restrictions on the use of proceeds from debt issuances and asset
sales.

In connection with our registration as a public utility holding company
under the 1935 Act, the SEC has placed the following limitations on our external
debt:

o the aggregate amount of CenterPoint Houston's external borrowings has
been limited to $3.55 billion;

o the aggregate amount of CERC Corp.'s external borrowings has been
limited to $2.7 billion; and

o the aggregate amount of Texas Genco's external borrowings has been
limited to $500 million.

Additionally, the SEC has placed limitations on our dividends and the
dividends of our subsidiaries that require common equity as a percentage of
total capitalization for CenterPoint Houston, CERC Corp. and Texas Genco to be
at least 30% after the payment of such dividends. The order issued by the SEC
that authorizes our financing program expires on June 30, 2003, and we must seek
a new financing order before that date. Any new order may contain restrictions
or authorizations different from those described above.

Security Interest in Receivables. Effective March 28, 2003, Texas Genco,
LP, a subsidiary of Texas Genco, amended a Master Power Purchase and Sale
Agreement with a subsidiary of Reliant Resources related to ERCOT power sales.
Texas Genco, LP was granted a security interest in accounts receivable and/or
securitization notes associated with the accounts receivable of certain
subsidiaries of Reliant Resources to secure up to $250 million in purchase
obligations.

CRITICAL ACCOUNTING POLICIES

A critical accounting policy is one that is both important to the
presentation of our financial condition and results of operations and requires
management to make difficult, subjective or complex accounting estimates. An
accounting estimate is an approximation made by management of a financial
statement element, item or account in the financial statements. Accounting
estimates in our historical consolidated financial statements measure the
effects of past business transactions or events, or the present status of an
asset or liability. The accounting estimates

43

described below require us to make assumptions about matters that are highly
uncertain at the time the estimate is made. Additionally, different estimates
that we could have used or changes in an accounting estimate that are reasonably
likely to occur could have a material impact on the presentation of our
financial condition or results of operations. The circumstances that make these
judgments difficult, subjective and/or complex have to do with the need to make
estimates about the effect of matters that are inherently uncertain. Estimates
and assumptions about future events and their effects cannot be predicted with
certainty. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments. These estimates may change
as new events occur, as more experience is acquired, as additional information
is obtained and as our operating environment changes. We believe the following
critical accounting policies involve the application of accounting estimates for
which a change in the estimate is inseparable from the effect of a change in
accounting principle. Accordingly, these accounting policies have been reviewed
and discussed with the audit committee of the board of directors.

ACCOUNTING FOR RATE REGULATION

SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS No. 71), provides that rate-regulated entities account for and report
assets and liabilities consistent with the recovery of those incurred costs in
rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that
such rates can be charged and collected. Application of SFAS No. 71 to the
electric generation portion of our business was discontinued as of June 30,
1999. Our Electric Transmission & Distribution business continues to apply SFAS
No. 71 which results in our accounting for the regulatory effects of recovery of
"stranded costs" and other "regulatory assets" resulting from the unbundling of
the transmission and distribution business from our electric generation
operations in our consolidated financial statements. Certain expenses and
revenues subject to utility regulation or rate determination normally reflected
in income are deferred on the balance sheet and are recognized in income as the
related amounts are included in service rates and recovered from or refunded to
customers. Regulatory assets reflected in our Consolidated Balance Sheets
aggregated $4.0 billion and $4.6 billion as of December 31, 2002 and March 31,
2003, respectively. Additionally, regulatory liabilities reflected in our
consolidated Balance Sheets aggregated $1.1 billion at both December 31, 2002
and March 31, 2003. Significant accounting estimates embedded within the
application of SFAS No. 71 with respect to our Electric Transmission &
Distribution business segment relate to $2.5 billion of recoverable electric
generation plant mitigation assets (stranded costs) and $829 million of ECOM
true-up as of March 31, 2003. The stranded costs are comprised of $1.1 billion
of previously recorded accelerated depreciation and $841 million of previously
redirected depreciation as well as $396 million related to the Texas Genco
distribution. These stranded costs are recoverable under the provisions of the
Texas electric restructuring law. The ultimate amount of stranded cost recovery
is subject to a final determination which will occur in 2004 and is contingent
upon the market value of Texas Genco. Any significant changes in our accounting
estimate of stranded costs as a result of current market conditions or changes
in the regulatory recovery mechanism currently in place could result in a
material write-down of all or a portion of these regulatory assets. Regulatory
assets related to ECOM true-up represent the regulatory assets associated with
costs incurred as a result of mandated capacity auctions conducted beginning in
2002 by our Electric Generation business being consummated at market-based
prices that have been substantially below the estimate of those prices made by
the Texas Utility Commission in the spring of 2001. Any significant changes in
our estimate of our regulatory asset associated with ECOM true-up could have a
significant effect on our financial condition and results of operations.
Additionally, any significant changes in our estimated stranded costs or ECOM
true-up recovery could significantly affect our liquidity subsequent to the
final true-up proceedings conducted by the Texas Utility Commission which are
expected to conclude in late 2004.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets recorded in our Consolidated Balance Sheets primarily
consist of property, plant and equipment (PP&E). Net PP&E comprises $11.2
billion or 55% of our total assets as of March 31, 2003. We make judgments and
estimates in conjunction with the carrying value of these assets, including
amounts to be capitalized, depreciation and amortization methods and useful
lives. We evaluate our PP&E for impairment whenever indicators of impairment
exist. Accounting standards require that if the sum of the undiscounted expected
future cash flows from a company's asset is less than the carrying value of the
asset, an asset impairment must be recognized in the financial statements. The
amount of impairment recognized is calculated by subtracting the fair value of
the asset from the carrying value of the asset.

44

As a result of the distribution of approximately 19% of Texas Genco's
common stock to our shareholders on January 6, 2003, we re-evaluated our
electric generation assets for impairment as of December 31, 2002. This analysis
required us to make long-term estimates of future cash receipts associated with
the operation or sale of these electric generation assets and related cash
outflows. These forecasts require assumptions about demand for electricity
within the ERCOT market, future ERCOT market conditions, commodity prices and
regulatory developments. As of December 31, 2002, no impairment had been
indicated because the estimated cash flows associated with the operations of
their assets exceeded their carrying value. However, the effects of competition
within the ERCOT market, the results of our capacity auctions, and the timing
and extent of changes in commodity prices, particularly natural gas prices,
could have a significant effect on our future cash flows and, therefore, affect
any future determination of asset impairment.

IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

We evaluate our goodwill and other indefinite-lived intangible assets for
impairment at least annually and more frequently when indicators of impairment
exist. Accounting standards require that if the fair value of a reporting unit
is less than its carrying value, including goodwill, a charge for impairment of
goodwill must be recognized. To measure the amount of the impairment loss, we
would compare the implied fair value of the reporting unit's goodwill with its
carrying value.

We recorded goodwill associated with the acquisition of our Natural Gas
Distribution and Pipelines and Gathering operations in 1997. We reviewed our
goodwill for impairment as of January 1, 2003. We computed the fair value of the
Natural Gas Distribution and the Pipelines and Gathering operations as the sum
of the discounted estimated net future cash flows applicable to each of these
operations. We determined that the fair value for each of the Natural Gas
Distribution operations and the Pipelines and Gathering operations exceeded
their corresponding carrying value, including unallocated goodwill. We also
concluded that no interim impairment indicators existed subsequent to this
initial evaluation. As of March 31, 2003 we had recorded $1.7 billion of
goodwill. Future evaluations of the carrying value of goodwill could be
significantly impacted by our estimates of cash flows associated with our
Natural Gas Distribution and Pipelines and Gathering operations, regulatory
matters, and estimated operating costs.

UNBILLED ENERGY REVENUES

Revenues related to the sale and/or delivery of electricity or natural gas
(energy) are generally recorded when energy is delivered to customers. However,
the determination of energy sales to individual customers is based on the
reading of their meters, which is performed on a systematic basis throughout the
month. At the end of each month, amounts of energy delivered to customers since
the date of the last meter reading are estimated and the corresponding unbilled
revenue is estimated. Unbilled electric delivery revenue is estimated each month
based on daily supply volumes, applicable rates and analyses reflecting
significant historical trends and experience. Unbilled natural gas sales are
estimated based on estimated purchased gas volumes, estimated lost and
unaccounted for gas and tariffed rates in effect. Accrued unbilled revenues
recorded in the Consolidated Balance Sheets as of December 31, 2002 were $70
million related to our Electric Transmission & Distribution business segment and
$284 million related to our Natural Gas Distribution business segment. Accrued
unbilled revenues recorded in the Consolidated Balance Sheets as of March 31,
2003 were $61 million related to our Electric Transmission & Distribution
business segment and $277 million related to our Natural Gas Distribution
business segment.

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, we adopted SFAS No. 143. SFAS No. 143 requires
the fair value of an asset retirement obligation to be recognized as a liability
is incurred and capitalized as part of the cost of the related tangible
long-lived assets. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life of the
related asset. Retirement obligations associated with long-lived assets included
within the scope of SFAS No. 143 are those for which a legal obligation exists
under enacted laws, statutes and written or oral contracts, including
obligations arising under the doctrine of promissory estoppel.

We have identified retirement obligations for nuclear decommissioning at
the South Texas Project and for lignite mine operations at the Jewett mine
supplying the Limestone

45

electric generation facility. Prior to adoption of SFAS No. 143, we had recorded
liabilities for nuclear decommissioning and the reclamation of the lignite mine.
Liabilities were recorded for estimated decommissioning obligations of $139.7
million and $39.7 million for reclamation of the lignite at December 31, 2002.
Upon adoption of SFAS No. 143 on January 1, 2003, we reversed the $139.7 million
previously accrued for the nuclear decommissioning of the South Texas Project
and recorded a plant asset of $99.1 million offset by accumulated depreciation
of $35.8 million as well as a retirement obligation of $186.7 million. The $16.3
million difference between amounts previously recorded and the amounts recorded
upon adoption of SFAS No. 143 is being deferred as a liability due to regulatory
requirements. We also reversed the $39.7 million we had previously recorded for
the Jewett mine reclamation and recorded a plant asset of $1.9 million offset by
accumulated depreciation of $0.4 million as well as a retirement obligation of
$3.8 million. The $37.4 million difference between amounts previously recorded
and the amounts recorded upon adoption of SFAS No. 143 was recorded as a
cumulative effect of accounting change. We have also identified other asset
retirement obligations that cannot be calculated because the assets associated
with the retirement obligations have an indeterminate life.

The following represents the balances of the asset retirement obligation as
of January 1, 2003 and the additions and accretion of the asset retirement
obligation for the three months ended March 31, 2003:

Our rate-regulated businesses have previously recognized removal costs as a
component of depreciation expense in accordance with regulatory treatment. As of
March 31, 2003, these previously recognized removal costs of $639

46

million do not represent SFAS No. 143 asset retirement obligations, but rather
embedded regulatory liabilities. Our non-rate regulated businesses have also
previously recognized removal costs as component of depreciation expense. We
reversed $115 million in the three months ended March 31, 2003 of previously
recognized removal costs with respect to these non-rate-regulated businesses as
a cumulative effect of accounting change. The total cumulative effect of
accounting change from adoption of SFAS No. 143 was $152 million. Excluded from
the $80 million after-tax cumulative effect of accounting change recorded for
the three months ended March 31, 2003, is minority interest of $19 million
related to the Texas Genco stock not owned by us.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" (SFAS No. 145). SFAS No. 145
eliminates the current requirement that gains and losses on debt extinguishment
must be classified as extraordinary items in the income statement. Instead, such
gains and losses will be classified as extraordinary items only if they are
deemed to be unusual and infrequent. SFAS No. 145 also requires that capital
leases that are modified so that the resulting lease agreement is classified as
an operating lease be accounted for as a sale-leaseback transaction. The changes
related to debt extinguishment are effective for fiscal years beginning after
May 15, 2002, and the changes related to lease accounting are effective for
transactions occurring after May 15, 2002. We have applied this guidance
prospectively as it relates to lease accounting and will apply the accounting
provisions related to debt extinguishment in 2003. Upon adoption of SFAS No.
145, any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods will be reclassified. No such
reclassification was required in the three month period ended March 31, 2002. We
have reclassified the $26 million loss on debt extinguishment related to the
fourth quarter of 2002 from extraordinary item to interest expense.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" (EITF No. 94-3).
The principal difference between SFAS No. 146 and EITF No. 94-3 relates to the
requirements for recognition of a liability for costs associated with an exit or
disposal activity. SFAS No. 146 requires that a liability be recognized for a
cost associated with an exit or disposal activity when it is incurred. A
liability is incurred when a transaction or event occurs that leaves an entity
little or no discretion to avoid the future transfer or use of assets to settle
the liability. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. In addition, SFAS No. 146
also requires that a liability for a cost associated with an exit or disposal
activity be recognized at its fair value when it is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. We will apply the provisions of SFAS No. 146 to all exit or disposal
activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of certain
guarantees. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued. The provision for initial recognition and measurement of
the liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not materially affect our
consolidated financial statements.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51"
(FIN 46). FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We do not expect the adoption of
FIN 46 to have a material impact on our results of operations or financial
condition.

47

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY PRICE RISK

We assess the risk of our non-trading derivatives (Energy Derivatives)
using a sensitivity analysis method.

The sensitivity analysis performed on our Energy Derivatives measures the
potential loss based on a hypothetical 10% movement in energy prices. A decrease
of 10% in the market prices of energy commodities from their March 31, 2003
levels would have decreased the fair value of our Energy Derivatives from their
levels on that date by $28 million.

The above analysis of the Energy Derivatives utilized for hedging purposes
does not include the favorable impact that the same hypothetical price movement
would have on our physical purchases and sales of natural gas to which the
hedges relate. Furthermore, the Energy Derivative portfolio is managed to
complement the physical transaction portfolio, reducing overall risks within
limits. Therefore, the adverse impact to the fair value of the portfolio of
Energy Derivatives held for hedging purposes associated with the hypothetical
changes in commodity prices referenced above would be offset by a favorable
impact on the underlying hedged physical transactions.

INTEREST RATE RISK

We have outstanding long-term debt, bank loans, mandatory redeemable
preferred securities of subsidiary trusts holding solely our junior subordinated
debentures (Trust Preferred Securities), securities held in our nuclear
decommissioning trusts, some lease obligations and our obligations under the
ZENS that subject us to the risk of loss associated with movements in market
interest rates. We utilize interest-rate swaps in order to hedge a portion of
our floating-rate debt.

Our floating-rate obligations to third parties aggregated $5.1 billion at
March 31, 2003. If the floating rates were to increase by 10% from March 31,
2003 rates, our combined interest expense to third parties would increase by a
total of $3.2 million each month in which such increase continued.

At March 31, 2003, we had outstanding fixed-rate debt (excluding indexed
debt securities) and Trust Preferred Securities aggregating $6.1 billion in
principal amount and having a fair value of $6.3 billion. These instruments are
fixed-rate and, therefore, do not expose us to the risk of loss in earnings due
to changes in market interest rates. However, the fair value of these
instruments would increase by approximately $332 million if interest rates were
to decline by 10% from their levels at March 31, 2003. In general, such an
increase in fair value would impact earnings and cash flows only if we were to
reacquire all or a portion of these instruments in the open market prior to
their maturity.

As discussed in Note 13(f) to the CenterPoint Energy Notes, which note is
incorporated herein by reference, we contribute $2.9 million per year to trusts
established to fund our share of the decommissioning costs for the South Texas
Project. The securities held by the trusts for decommissioning costs had an
estimated fair value of $158 million as of March 31, 2003, of which
approximately 48% were debt securities that subject us to risk of loss of fair
value with movements in market interest rates. If interest rates were to
increase by 10% from their levels at March 31, 2003, the fair value of the
fixed-rate debt securities would decrease by approximately $1 million. Any
unrealized gains or losses are accounted for as a long-term asset/liability as
we will not benefit from any gains, and losses will be recovered through the
rate making process. For further discussion regarding the recovery of
decommissioning costs pursuant to the Texas electric restructuring law, please
read Note 4(a) to the CenterPoint Energy Notes.

As discussed in Note 9(b) to the CenterPoint Energy Notes, which note is
incorporated herein by reference, CERC Corp.'s $240 million aggregate principal
amount of TERM Notes outstanding at March 31, 2003, include an embedded option
to remarket the securities. The option is expected to be exercised in the event
that the ten-year Treasury rate is below 5.66%. At March 31, 2003, we could
terminate the option at a cost of $31 million. A decrease of 10% in the March
31, 2003 level of interest rates would increase the cost of termination of the
option by approximately $12 million. On April 14, 2003, CERC Corp. retired an
additional $100 million principal amount of its TERM Notes obligations, leaving
a remaining balance of $140 million of TERM Notes due November 1, 2003.

As discussed in Note 7 to the CenterPoint Energy Notes, which note is
incorporated herein by reference, upon adoption of SFAS No. 133 effective
January 1, 2001, the ZENS obligation was bifurcated into a debt component and a
derivative component. The debt component of $104 million at March 31, 2003 is a
fixed-rate

48

obligation and, therefore, does not expose us to the risk of loss in earnings
due to changes in market interest rates. However, the fair value of the debt
component would increase by approximately $16 million if interest rates were to
decline by 10% from levels at March 31, 2003. Changes in the fair value of the
derivative component will be recorded in our Statements of Consolidated Income
and, therefore, we are exposed to changes in the fair value of the derivative
component as a result of changes in the underlying risk-free interest rate. If
the risk-free interest rate were to increase by 10% from March 31, 2003 levels,
the fair value of the derivative component would increase by approximately $4
million, which would be recorded as a loss in our Statements of Consolidated
Income.

As of March 31, 2003, we have interest rate swaps with an aggregate
notional amount of $750 million that fix the interest rate applicable to
floating rate short-term debt. At March 31, 2003, the swaps relating to
short-term debt could be terminated at a cost of $14 million. These swaps do not
qualify as cash flow hedges under SFAS No. 133, and are marked to market in the
Company's Consolidated Balance Sheets with changes reflected in interest expense
in the Statements of Consolidated Income. A decrease of 10% in the March 31,
2003 level of interest rates would increase the cost of terminating the swaps at
March 31, 2003 by $1 million.

EQUITY MARKET VALUE RISK

We are exposed to equity market value risk through our ownership of
approximately 22 million shares of AOL TW common stock, which we hold to
facilitate our ability to meet our obligations under the ZENS. Please read Note
7 to the CenterPoint Energy Notes for a discussion of the effect of adoption of
SFAS No. 133 on our ZENS obligation and our historical accounting treatment of
our ZENS obligation. Subsequent to adoption of SFAS No. 133, a decrease of 10%
from the March 31, 2003 market value of AOL Time Warner common stock would
result in a net loss of approximately $3 million, which would be recorded as a
loss in our Statements of Consolidated Income.

As discussed above under "-- Interest Rate Risk," we contribute to trusts
established to fund our share of the decommissioning costs for the South Texas
Project, which held debt and equity securities as of March 31, 2003. The equity
securities expose us to losses in fair value. If the market prices of the
individual equity securities were to decrease by 10% from their levels at March
31, 2003, the resulting loss in fair value of these securities would be
approximately $8 million. Currently, the risk of an economic loss is mitigated
as discussed above under "-- Interest Rate Risk."

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

49

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For a description of certain legal and regulatory proceedings affecting
CenterPoint Energy, please read Note 12 to our Interim Financial Statements,
"Business -- Environmental Matters" in Item 1 of the CenterPoint Energy 10-K,
"Legal Proceedings" in Item 3 of the CenterPoint Energy Form 10-K and Notes 4
and 13 to the CenterPoint Energy Notes, all of which are incorporated herein
by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Our credit facility restricts our ability to pay dividends. Please read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CenterPoint Energy and Subsidiaries--Liquidity and Capital
Resources--Future Sources and Uses of Cash Flows--Long-Term Debt" in Item 2 of
Part I of this report.

ITEM 5. OTHER INFORMATION.

Forward-Looking Statements. From time to time, we make statements
concerning our expectations, beliefs, plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
that are not historical facts. These statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those expressed or implied by these
statements. You can generally identify our forward-looking statements by the
words "anticipate," "believe," "continue," "could," "estimate," "expect,"
"forecast," "goal," "intend," "may," "objective," "plan," "potential,"
"predict," "projection," "should," "will," or other similar words.

We have based our forward-looking statements on our management's beliefs
and assumptions based on information available to our management at the time the
statements are made. We caution you that assumptions, beliefs, expectations,
intentions and projections about future events may and often do vary materially
from actual results. Therefore, we cannot assure you that actual results will
not differ materially from those expressed or implied by our forward-looking
statements.

The following are some of the factors that could cause actual results to
differ materially from those expressed or implied in forward-looking statements:

o state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the electric
utility industry, constraints placed on our activities or business by the
1935 Act, changes in or application of laws or regulations applicable to
other aspects of our business and actions with respect to:

o approval of stranded costs;

o allowed rates of return;

o rate structures;

o recovery of investments; and

o operation and construction of facilities;

o non-payment for our services due to financial distress of our customers,
including Reliant Resources;

o the successful and timely completion of our capital projects;

o industrial, commercial and residential growth in our service territory and
changes in market demand and demographic patterns;

o changes in business strategy or development plans;

o the timing and extent of changes in commodity prices, particularly natural
gas;

o commercial bank and financial market conditions, our access to capital, the
cost of such capital, receipt of certain approvals under the 1935 Act, and
the results of our financing and refinancing efforts, including
availability of funds in the debt capital markets;

o actions by rating agencies;

o legal and administrative proceedings and settlements;

o changes in tax laws;

o inability of various counterparties to meet their obligations with respect
to our financial instruments;

o any lack of effectiveness of our disclosure controls and procedures;

o changes in technology;

o significant changes in our relationship with our employees, including the
availability of qualified personnel and potential adverse effects if labor
disputes or grievances were to occur;

o significant changes in critical accounting policies;

o acts of terrorism or war, including any direct or indirect effect on our
business resulting from terrorist attacks such as occurred on September 11,
2001 or any similar incidents or responses to those incidents;

o the availability and price of insurance;

o the outcome of the pending securities lawsuits against us, Reliant Energy
and Reliant Resources;

o the outcome of the Securities and Exchange Commission investigation
relating to the treatment in our consolidated financial statements of
certain activities of Reliant Resources;

o the ability of Reliant Resources to satisfy its indemnity obligations to
us;

o the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in our service territory,
including the systems owned and operated by the independent system operator
in the market served by the Electric Reliability Council of Texas, Inc.;

o political, legal, regulatory and economic conditions and developments in
the United States; and

o other factors we discuss in the CenterPoint Energy Form 10-K, including
those outlined in Item 1 under "Risk Factors".

You should not place undue reliance on forward-looking statements. Each
forward-looking statement speaks only as of the date of the particular
statement, and we undertake no obligation to publicly update or revise any
forward-looking statements.

51

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

The following exhibits are filed herewith:

Exhibits not incorporated by reference to a prior filing are designated
by a cross (+); all exhibits not so designated are incorporated by
reference to a prior filing of CenterPoint Energy, Inc.

SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER DESCRIPTION REPORT OR REGISTRATION STATEMENT NUMBER REFERENCE
------------ ------------------------------------- --------------------------------------- ------------ -----------
3.1 -- Amended and Restated Articles of CenterPoint Energy's Registration 3-69502 3.1
Incorporation of CenterPoint Energy Statement on Form S-4
3.2 -- Articles of Amendment to Amended CenterPoint Energy's Form 10-K for the 1-31447 3.1.1
and Restated Articles of year ended December 31, 2001
Incorporation of CenterPoint Energy
3.3 -- Amended and Restated Bylaws of CenterPoint Energy's Form 10-K for the 1-31447 3.2
CenterPoint Energy year ended December 31, 2001
3.4 -- Statement of Resolution CenterPoint Energy's Form 10-K for the 1-31447 3.3
Establishing Series of Shares year ended December 31, 2001
designated Series A Preferred Stock
of CenterPoint Energy
4.1.1 -- General Mortgage Indenture, dated CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(1)
as of October 10, 2002, between quarter ended September 30, 2002
CenterPoint Energy Houston
Electric, LLC and JPMorgan Chase
Bank, as Trustee
4.1.2 -- First Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(2)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.3 -- Second Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(3)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.4 -- Third Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(4)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.5 -- Fourth Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(5)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.6 -- Fifth Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(6)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.7 -- Sixth Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(7)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.8 -- Seventh Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(8)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.9 -- Eighth Supplemental Indenture to CenterPoint Houston's Form 10-Q for the 1-3187 4(j)(9)
Exhibit 4.1.1, dated as of quarter ended September 30, 2002
October 10, 2002
4.1.10 -- Ninth Supplemental Indenture to CenterPoint Energy's Form 10-K for the 1-31447 4(c)(10)
Exhibit 4.1.1, dated as of year ended December 31, 2002
November 12, 2002
4.1.11 -- Tenth Supplemental Indenture to CenterPoint Energy's Form 8-K dated 1-31447 4.1
Exhibit 4(e)(1), dated as of March March 13, 2003
18, 2003
4.2 -- Officer's Certificate dated CenterPoint Energy's Form 8-K dated 1-31447 4.2
March 18, 2003 setting forth the March 13, 2003
form, terms and provisions of the
Tenth Series and Eleventh Series
of general mortgage bonds
4.3.1 -- $3,850,000 Amended and Restated CenterPoint Energy's Form 10-Q for the 1-31447 10(a)
Credit Agreement, dated as of quarter ended September 30, 2002
October 31, 2002, among
CenterPoint Energy and the
banks named therein
4.3.2 -- First Amendment to Exhibit 4.3.1 CenterPoint Energy's Form 10-K for the 1-31447 4(f)(2)
effective December 5, 2002 year ended December 31, 2002
4.3.3 -- Second Amendment to Exhibit 4.3.1 CenterPoint Energy's Form 10-K for the 1-31447 4(f)(3)
effective February 28, 2003 year ended December 31, 2002
4.3.4 -- Form of warrant agreement related CenterPoint Energy's Form 10-K for the 1-31447 4(f)(4)
to Exhibit 4.3.3 year ended December 31, 2002
4.3.5 -- Form of warrant registration rights CenterPoint Energy's Form 10-K for the 1-31447 4(f)(5)
agreement related to Exhibit 4.3.3 year ended December 31, 2002
4.3.6 -- Form of pledge agreement related CenterPoint Energy's Form 10-K for the 1-31447 4(f)(6)
to Exhibit 4.3.3 year ended December 31, 2002
4.4.1 -- Indenture, dated as of February 1, CERC's Form 8-K dated February 5, 1998 1-13265 4.1
1998, between RERC Corp. and
Chase Bank of Texas, National
Association, as Trustee
4.4.2 -- Supplemental Indenture No. 1 to CERC's Form 8-K dated February 5, 1998 1-13265 4.2
Exhibit 4.4.1, dated as of
February 1, 1998, providing for
the issuance of RERC Corp's
6 1/2% Debentures due February 1,
2008
4.4.3 -- Supplemental Indenture No. 2 to CERC's Form 8-K dated November 9, 1998 1-13265 4.1
Exhibit 4.4.1, dated as of
November 1, 1998, providing for
the issuance of RERC Corp's
6 3/8% Term Enhanced ReMarketable
Securities
4.4.4 -- Supplemental Indenture No. 3 to CERC's Registration Statement on 333-49162 4.2
Exhibit 4.4.1, dated as of July 1, Form S-4
2000, providing for the issuance
of RERC Corp.'s 8.125% Notes
due 2005
4.4.5 -- Supplemental Indenture No. 4 to CERC's Form 8-K dated February 21, 2001 1-13265 4.1
Exhibit 4.4.1, dated as of
February 15, 2001, providing for
the issuance of RERC Corp's
7.75% Notes due 2011
4.4.6 -- Supplemental Indenture No. 5 CenterPoint Energy's Form 8-K dated 1-31447 4.1
to Exhibit 4.4.1, dated as of March 18, 2003
March 25, 2003, providing for the
issuance of CERC Corp.'s 7.875%
Senior Notes due 2013
4.4.7 -- Supplemental Indenture No. 6 CenterPoint Energy's Form 8-K dated 1-31447 4.2
to Exhibit 4.4.1, dated as of April 7, 2003
April 14, 2003, providing for the
issuance of CERC Corp.'s 7.875%
Senior Notes due 2013
+4.5 -- $200,000,000 Credit Agreement,
dated as of March 25, 2003,
among CERC Corp., as Borrower,
and the Initial Lenders named
therein, as Initial Lenders
+99.1 -- Section 906 Certification of
David M. McClanahan
+99.2 -- Section 906 Certification of
Gary L. Whitlock

On January 7, 2003, we filed a Current Report on Form 8-K dated January 6,
2003, announcing that we had distributed approximately 19% of the 80 million
outstanding shares of Texas Genco common stock to our shareholders of record as
of the close of business on December 20, 2002.

On January 27, 2003, we filed a Current Report on Form 8-K to furnish
information under Item 9 of that form regarding earnings guidance for Texas
Genco and the filing of a post-effective amendment on Form U-1/A.

On February 13, 2003, we filed a Current Report on Form 8-K dated February
13, 2003, relating to the announcement of fourth quarter 2002 and year-end 2002
results.

On March 3, 2003, we filed a Current Report on Form 8-K dated February 28,
2003, announcing that we had amended and extended our $3.85 billion credit
facility from October 2003 to June 30, 2005.

On March 27, 2003, we filed a Current Report on Form 8-K dated March 18,
2003, announcing the pricing and closing of $650 million of senior notes of our
subsidiary, CenterPoint Energy Resources Corp., in a private placement with
institutions pursuant to Rule 144A under the Securities Act of 1933, as amended.

On March 27, 2003, we filed a Current Report on Form 8-K dated March 13,
2003, announcing the pricing and closing of $762.275 million of general mortgage
bonds by our subsidiary, CenterPoint Energy Houston Electric, LLC, in a private
placement with institutions pursuant to Rule 144A under the Securities Act of
1933, as amended.

On April 8, 2003, we filed a Current Report on Form 8-K to furnish
information under Item 9 of that form regarding our external debt balances as of
March 31, 2003.

On April 23, 2003, we filed a Current Report on Form 8-K dated April 16,
2003, reporting the filing of a class action lawsuit in California against
CenterPoint Energy, Inc. and others and the shutdown of a reactor at the South
Texas Project Nuclear Generating Station.

53

On April 24, 2003, we filed a Current Report on Form 8-K dated April 24,
2003, in which we announced first quarter 2003 earnings.

On May 1, 2003, we filed a Current Report on Form 8-K dated April 7, 2003,
announcing the pricing and closing of $112 million of senior notes of our
subsidiary, CenterPoint Energy Resources Corp., which will be added to and form
a single series with its prior existing 7.875% senior notes due on April 1,
2013, in a private placement with institutions pursuant to Rule 144A under the
Securities Act of 1933, as amended. We also furnished under Item 9 and Item 12
of Form 8-K transcripts of the earnings conference call held on April 24, 2003.

On May 12, 2003, we filed a Current Report on Form 8-K dated May 12, 2003,
to provide information giving effect to certain reclassifications within our
historical consolidated financial statements, Selected Financial Data, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations as reported on our Annual Report on Form 10-K for the year ended
December 31, 2002.

54

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

1. I have reviewed this quarterly report on Form 10-Q of
CenterPoint Energy, Inc.;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

1. I have reviewed this quarterly report on Form 10-Q of CenterPoint
Energy, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

SECTION 1.01. Certain Defined Terms. As used in this
Agreement, the following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined):

"Acquired Entity" has the meaning set forth in the definition
of "Permitted Liens".

"Advance" means a Revolving Advance or a CAF Advance, as the
case may be, by a Lender to the Borrower pursuant to Article II, and
refers to a Base Rate Advance or a Eurodollar Rate Advance (each of
which shall be a "Type" of Advance).

"Affiliate" of any Person means any other Person that,
directly or indirectly, Controls or is Controlled by or is under common
Control with such first Person.

"Aggregate Outstanding Extensions of Credit" means, as to any
Lender at any time, an amount equal to the aggregate principal amount
of all Revolving Advances and CAF Advances made by such Lender then
outstanding.

"Applicable Lending Office" means, with respect to each
Lender, such Lender's Domestic Lending Office in the case of a Base
Rate Advance and such Lender's Eurodollar Lending Office in the case of
a Eurodollar Rate Advance or CAF Eurodollar Rate Advance.

"Applicable Margin" means, as of any date, a percentage per
annum determined by reference to the Public Debt Rating in effect on
such date as set forth below:

"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an Eligible Assignee, and accepted by the
Administrative Agent, in substantially the form of Exhibit C hereto.

"Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be
equal to the higher of:

(a) the rate of interest announced publicly by
Citibank, N.A. in New York, New York, from time to time, as
its base rate; and

"Board" means the Board of Governors of the Federal Reserve
System of the United States (or any successor).

"Borrowed Money" of any Person means any Indebtedness of such
Person for or in respect of money borrowed or raised by whatever means
(including acceptances, deposits and lease obligations under Capital
Leases); provided, however, that Borrowed Money shall not include (a)
any guarantees that may be incurred by endorsement of negotiable
instruments for deposit or collection in the ordinary course of
business or similar transactions, (b) any obligations or guarantees of
performance of obligations under a franchise, performance bonds,
franchise bonds, obligations to reimburse drawings under letters of
credit issued in accordance with the terms of any safe harbor lease or
franchise or in lieu of performance or in

CERC 364-Day Revolving Credit Agreement

3

lieu of franchise bonds or other obligations that do not represent
money borrowed or raised, which reimbursement obligations in each case
shall be payable in full within ten (10) Business Days after the date
upon which such obligation arises, (c) trade payables, (d) customer
advance payments and deposits arising in the ordinary course of such
Person's business, (e) operating leases and (f) obligations under swap
agreements.

"Borrowing" means either a Revolving Borrowing or a CAF
Borrowing.

"Borrowing Date" means any Business Day specified by the
Borrower as a date on which the Borrower requests the relevant Lenders
to make Advances hereunder.

"Bridge Credit Agreement" means the $350,000,000 Bridge Credit
Agreement to be entered into among the Borrower, Salomon Smith Barney
Inc. as lead arranger, the lenders party thereto and Citicorp North
America, Inc. as administrative agent.

"Bridge Lenders" means the "Lenders" as defined in the Bridge
Credit Agreement.

"Business Day" means a day of the year on which banks are not
required or authorized by law to close in New York City and, if the
applicable Business Day relates to any Eurodollar Rate Advances, on
which dealings are carried on in the London interbank market.

"CAF Advance" means an Advance made to the Borrower pursuant
to Section 2.04 by a Lender in response to a Competitive Bid Request.

"CAF Borrowing" means a borrowing consisting of CAF Advances
under Section 2.04 consisting of CAF Advances of the same Type made on
the same day by the Lender or Lenders whose Competitive Bid or Bids
have been accepted pursuant to Section 2.04(d).

"CAF Margin" means, as to any Competitive Bid relating to a
CAF Eurodollar Rate Advance, the margin (expressed as a percentage rate
per annum in the form of a decimal to no more than four decimal places)
to be added to or subtracted from the Eurodollar Rate in order to
determine the interest rate acceptable to such Lender with respect to
such CAF Eurodollar Rate Advance.

"CAF Note" means a promissory note of the Borrower payable to
the order of any Lender that has requested a CAF Note pursuant to
Section 2.18(a), in substantially the form of Exhibit D hereto,
evidencing the aggregate indebtedness of the Borrower to such Lender
resulting from the CAF Advances made by such Lender.

"CAF Rate" means, as to any Competitive Bid made by a Lender
pursuant to Section 2.04(b), (i) in the case of a CAF Eurodollar Rate
Advance, the CAF Margin added to or subtracted from, as the case may
be, the Eurodollar Rate, and (ii) in the case of a Fixed Rate Advance,
the fixed rate of interest, in each case, offered by such Lender.

"Capital Lease" means a lease that, in accordance with GAAP,
would be recorded as a capital lease on the balance sheet of the
lessee.

"Cash Interest" means interest expense of the Borrower and its
Subsidiaries, to the extent actually paid in cash, during the relevant
period.

"Collateral" has the meaning specified in the Pledge
Agreement.

CERC 364-Day Revolving Credit Agreement

4

"Collateral Agent" has the meaning as set forth in the recital
of the parties hereto.

"Commitment" has the meaning specified in Section 2.01.

"Communications" has the meaning specified in Section 8.02(b).

"Competitive Bid" has the meaning as set forth in Section
2.04(b).

"Competitive Bid Confirmation" has the meaning as set forth in
Section 2.04(d).

"Competitive Bid Request" has the meaning as set forth in
Section 2.04(a).

"Confidential Information" means information that the Borrower
furnishes to the Administrative Agent or any Lender in a writing
designated as confidential or which in the Borrower's course of dealing
with the Administrative Agent or such Lender has been designated as
confidential, but does not include any such information that is or
becomes generally available to the public or that is or becomes
available to the Administrative Agent or such Lender from a source
other than the Borrower.

"Consolidated" refers to the consolidation of accounts in
accordance with GAAP.

"Consolidated Net Tangible Assets" means the total amount of
assets of the Borrower and its Subsidiaries less, without duplication,
(a) total current liabilities (excluding Indebtedness for Borrowed
Money due within 12 months); (b) all reserves for depreciation and
other asset valuation reserves, but, excluding reserves for deferred
federal income taxes arising from accelerated amortization or
otherwise; (c) all intangible assets such as goodwill, trademarks,
trade names, patents and unamortized debt discount and expense carried
as an asset; and (d) all appropriate adjustments on account of minority
interests of other persons holding common stock of any Subsidiary; all
as reflected in the Borrower's audited consolidated balance sheet most
recently delivered pursuant hereto prior to the date of a determination
of Consolidated Net Tangible Assets hereunder.

"Consolidated Shareholders' Equity" means, as of any date of
determination, the total assets of Borrower and its Consolidated
Subsidiaries less all liabilities of Borrower and its Consolidated
Subsidiaries. (As used in this definition, "liabilities" means all
obligations that, in accordance with GAAP consistently applied, would
be classified on a balance sheet as liabilities, including, without
limitation, (a) Indebtedness; (b) deferred liabilities; and (c)
Indebtedness of Borrower or any of its Consolidated Subsidiaries that
is expressly subordinated in right and priority of payment to other
liabilities of Borrower or such Consolidated Subsidiaries, but in any
case excluding as at such date of determination any Junior Subordinated
Debt owned by any Hybrid Preferred Securities Subsidiary and excluding
any adjustment, non-cash charge to net income or other non-cash charges
or write-offs resulting thereto from the application of SFAS No. 142
and similar provisions of GAAP).

"Controlled" means, with respect to any Person, the ability of
another Person (whether directly or indirectly and whether by the
ownership of voting securities, contract or otherwise) to appoint
and/or remove the majority of the members of the board of directors or
other governing body of that Person (and "Control" and "Controls" shall
be similarly construed).

"Convert", "Conversion" and "Converted" each refers to a
conversion of Revolving Advances of one Type into Revolving Advances of
the other Type pursuant to Section 2.09 or 2.10.

"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.

CERC 364-Day Revolving Credit Agreement

5

"Domestic Lending Office" means, with respect to any Lender,
the office of such Lender specified as its "Domestic Lending Office"
opposite its name on Schedule I hereto or in the Assignment and
Acceptance pursuant to which it became a Lender, or such other office
of such Lender as such Lender may from time to time specify to the
Borrower and the Administrative Agent.

"EBITDA" means, for any period, net income (or net loss) plus
the sum of (a) interest expense, (b) income tax expense, (c)
depreciation expense, (d) amortization expense and (e) to the extent
reflected as a charge in the computation of net income for such period,
any other non-cash charges, in each case determined in accordance with
GAAP for such period.

"Effective Date" has the meaning specified in Section 3.01.

"Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a
Lender; and (iii) any other Person approved by the Administrative Agent
and, unless an Event of Default has occurred and is continuing at the
time any assignment is effected in accordance with Section 8.07, the
Borrower, such approval not to be unreasonably withheld or delayed;
provided, however, that neither the Borrower nor an Affiliate of the
Borrower shall qualify as an Eligible Assignee.

"Environmental Action" means any action, suit, demand, demand
letter, claim, notice of non-compliance or violation, notice of
liability or potential liability, investigation, proceeding, consent
order or consent agreement relating in any way to any Environmental
Law, Environmental Permit or Hazardous Materials or arising from
alleged injury or threat of injury to health, safety or the
environment, including, without limitation, (a) by any governmental or
regulatory authority for enforcement, cleanup, removal, response,
remedial or other actions or damages and (b) by any governmental or
regulatory authority or any third party for damages, contribution,
indemnification, cost recovery, compensation or injunctive relief.

"Environmental Law" means any federal, state, local or foreign
statute, law, ordinance, rule, regulation, code, order, judgment,
decree or judicial or agency interpretation, policy or guidance having
the force of law relating to pollution or protection of the
environment, health, safety or natural resources, including, without
limitation, those relating to the use, handling, transportation,
treatment, storage, disposal, release or discharge of Hazardous
Materials.

"Equity Interests" means any capital stock, partnership, joint
venture, member or limited liability or unlimited liability company
interest, beneficial interest in a trust or similar entity or other
equity interest or investment of whatever nature.

"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.

"ERISA Affiliate" means any Person that for purposes of Title
IV of ERISA is a member of the Borrower's controlled group, or under
common control with the Borrower, within the meaning of Section 414 of
the Internal Revenue Code.

"ERISA Event" means (a) (i) the occurrence of a reportable
event, within the meaning of Section 4043 of ERISA, with respect to any
Plan unless the 30-day notice requirement with respect to such event
has been waived by the PBGC, or (ii) the requirements of subsection (1)
of Section 4043(b) of ERISA (without regard to subsection (2) of such
Section) are met with respect to a contributing sponsor, as defined in
Section 4001(a)(13) of ERISA, of a Plan, and an event described in
paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is
reasonably expected to occur with respect to such Plan within the
following 30 days; (b) the application for a minimum funding waiver
with respect to a Plan; (c) the provision by the administrator of any
Plan of a notice of intent to terminate such Plan pursuant to Section
4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in

CERC 364-Day Revolving Credit Agreement

6

Section 4041(e) of ERISA); (d) the cessation of operations at a
facility of the Borrower or any ERISA Affiliate in the circumstances
described in Section 4062(e) of ERISA; (e) the withdrawal by the
Borrower or any ERISA Affiliate from a Multiple Employer Plan during a
plan year for which it was a substantial employer, as defined in
Section 4001(a)(2) of ERISA; (f) the conditions for the imposition of a
lien under Section 302(f) of ERISA shall have been met with respect to
any Plan; (g) the adoption of an amendment to a Plan requiring the
provision of security to such Plan pursuant to Section 307 of ERISA; or
(h) the institution by the PBGC of proceedings to terminate a Plan
pursuant to Section 4042 of ERISA, or the occurrence of any event or
condition described in Section 4042 of ERISA that constitutes grounds
for the termination of, or the appointment of a trustee to administer,
a Plan.

"Eurocurrency Liabilities" has the meaning assigned to that
term in Regulation D of the Board of Governors of the Federal Reserve
System, as in effect from time to time.

"Eurodollar Lending Office" means, with respect to any Lender,
the office of such Lender specified as its "Eurodollar Lending Office"
opposite its name on Schedule I hereto or in the Assignment and
Acceptance pursuant to which it became a Lender (or, if no such office
is specified, its Domestic Lending Office), or such other office of
such Lender as such Lender may from time to time specify to the
Borrower and the Administrative Agent.

"Eurodollar Rate" means, for any Interest Period for each
Eurodollar Rate Advance comprising part of the same Borrowing, an
interest rate per annum equal to the rate per annum obtained by
dividing (a) the rate per annum (rounded upward to the nearest whole
multiple of 1/100 of 1% per annum, if such rate per annum is not such a
multiple) at which deposits in U.S. dollars are offered by the
principal office of Citibank, N.A. in London, England to prime banks in
the London interbank market at 11:00 A.M. (London time) two Business
Days before the first day of such Interest Period in an amount
substantially equal to the Administrative Agent's Eurodollar Rate
Advance comprising part of such Borrowing to be outstanding during such
Interest Period and for a period equal to such Interest Period by (b) a
percentage equal to 100% minus the Eurodollar Rate Reserve Percentage
for such Interest Period.

"Eurodollar Rate Reserve Percentage" for any Interest Period
for all Eurodollar Rate Advances or CAF Eurodollar Rate Advances
comprising part of the same Borrowing means the reserve percentage
applicable two Business Days before the first day of such Interest
Period under regulations issued from time to time by the Board of
Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including, without
limitation, any emergency, supplemental or other marginal reserve
requirement) for a member bank of the Federal Reserve System in New
York City with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities (or with respect to any other
category of liabilities that includes deposits by reference to which
the interest rate on Eurodollar Rate Advances or CAF Eurodollar Rate
Advances is determined) having a term equal to such Interest Period.

"Events of Default" has the meaning specified in Section 6.01.

"Excess Cash Flow" means, for any period,

(a) net cash provided by (used in) operating
activities as reported in the Borrower's Statements of
Consolidated Cash Flows, less

(b) net cash used in investing activities as reported
in the Borrower's Statements of Consolidated Cash Flows, plus

(c) if there was a net increase in Consolidated
Indebtedness for Borrowed Money (other than with respect to
amounts borrowed under this Agreement), the amount of such
increase, less

CERC 364-Day Revolving Credit Agreement

7

(d) if there was a net decrease in the amount of
Consolidated Indebtedness for Borrowed Money (other than with
respect to amounts borrowed under this Agreement), the amount
of such decrease.

"Exchange Act" means the Securities Exchange Act of 1933, as
amended.

"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such
transactions received by the Administrative Agent from three Federal
funds brokers of recognized standing selected by it.

"Fee Letter" means the 364-Day Revolving Credit Facility Fee
Letter dated as of February 28, 2003 between CUSA, SSBI and the
Borrower.

"Financial Officer" means, with respect to the Borrower, its
chief financial officer, chief accounting officer, treasurer, assistant
treasurer, comptroller or any other officer acceptable to the
Administrative Agent.

"Fixed Rate Advance" means any CAF Advance made by a Lender
pursuant to Section 2.04(b) based upon a fixed percentage rate per
annum offered by such Lender, expressed as a decimal (to no more than
four decimal places), and accepted by the Borrower.

"Fully Hedged" means, with respect to any Indexed Debt
Securities, that Borrower or any Consolidated Subsidiary of Borrower
either (i) owns or has in effect rights providing substantially the
economic effect, in such context, of owning, a sufficient amount of the
Indexed Asset relating thereto to satisfy completely its obligations at
maturity of the Indexed Debt Securities or (ii) has in effect a hedging
arrangement sufficient to enable it to satisfy completely its
obligations at maturity of the Indexed Debt Securities.

"GAAP" has the meaning specified in Section 1.03.

"Governmental Authority" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

"Guarantee" means, as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another
Person (including, without limitation, any bank under any letter of
credit) to induce the creation of which the guaranteeing person has
issued a reimbursement, counterindemnity or similar obligation, in
either case guaranteeing or in effect guaranteeing any principal of any
Indebtedness for Borrowed Money (the "primary obligations") of any
other third Person in any manner, whether directly or indirectly,
including, without limitation, any obligation of the guaranteeing
person, whether or not contingent, (i) to purchase any such primary
obligation or any property constituting direct or indirect security
therefor, (ii) to advance or supply funds for the purchase or payment
of any such primary obligation or (iii) otherwise to assure or hold
harmless the owner of any such primary obligation against loss in
respect thereof. The amount of any Guarantee of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such
Guarantee is made and (b) the maximum amount for which such
guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee, unless such primary obligation and
the maximum amount for which such guaranteeing person may be liable are
not stated or determinable, in which case the amount of such Guarantee
shall be such guaranteeing person's maximum reasonably anticipated
liability in respect thereof as determined by Borrower in good faith
(and "guaranteed" and "guarantor" shall be construed accordingly).

CERC 364-Day Revolving Credit Agreement

8

"Hazardous Materials" means (a) petroleum and petroleum
products, byproducts or breakdown products, radioactive materials,
asbestos-containing materials, polychlorinated biphenyls and radon gas
and (b) any other chemicals, materials or substances designated,
classified or regulated as hazardous or toxic or as a pollutant or
contaminant under any Environmental Law.

"Hybrid Preferred Securities Subsidiary" means any Delaware
business trust (or similar entity) (i) all of the common equity
interest of which is owned (either directly or indirectly through one
or more Wholly-Owned Subsidiaries) at all times by Borrower, (ii) that
has been formed for the purpose of issuing Hybrid Preferred Securities
and (iii) substantially all of the assets of which consist at all times
solely of the Junior Subordinated Debt and payments made from time to
time on the Junior Subordinated Debt.

"Indebtedness" of any Person means the sum of (a) all items
(other than capital stock, capital surplus and retained earnings) that,
in accordance with GAAP consistently applied, would be included in
determining total liabilities as shown on the liability side of a
balance sheet of such Person as at the date on which the Indebtedness
is to be determined and (b) the amount of all Guarantees by such
Person; provided, however, that Indebtedness of a Person shall not
include any Junior Subordinated Debt owned by any Hybrid Preferred
Securities Subsidiary or any Guarantee by Borrower of payments with
respect to any Hybrid Preferred Securities.

"Indexed Asset" means, with respect to any Indexed Debt
Security, (i) any security or commodity that is deliverable upon
maturity of such Indexed Debt Security to satisfy the obligations under
such Indexed Debt Security at maturity or (ii) any security, commodity
or index relating to one or more securities or commodities used to
determine or measure the obligations under such Indexed Debt Security
at maturity thereof.

"Indexed Debt Securities" means any security issued by
Borrower or any Consolidated Subsidiary of Borrower that (a) in
accordance with GAAP, is shown on the consolidated balance sheet of
Borrower and its Consolidated Subsidiaries as Indebtedness or a
liability and (b) the obligations at maturity of which may be satisfied
completely by the delivery of, or the amount of such obligations are
determined by reference to, (1) an equity security issued by an issuer
other than Borrower or any such Consolidated Subsidiary or (2) an
underlying index, commodity or security.

"Indenture" means the Indenture between the Borrower
(successor in interest to Arkla, Inc.) and Citibank, N.A., as trustee,
dated December 1, 1986, as supplemented by the First Supplemental
Indenture dated as of September 30, 1988, by the Second Supplemental
Indenture dated as of November 15, 1989 and by the Third Supplemental
Indenture dated as of August 6, 1997.

"Information Memorandum" means the information memorandum
dated February 28, 2003 used by the Administrative Agent in connection
with the syndication of the Commitments.

"Interest Period" means, for each Eurodollar Rate Advance
comprising part of the same Revolving Borrowing and each CAF Eurodollar
Rate Advance comprising part of the same CAF Borrowing, the period
commencing on the date of such Eurodollar Rate Advance or CAF
Eurodollar Rate Advance or the date of the Conversion of any Base Rate
Advance into such Eurodollar Rate Advance and ending on the last day of
the period selected by the Borrower pursuant to the provisions below
and, thereafter, with respect to Eurodollar Rate Advances, each
subsequent period commencing on the last day of the immediately
preceding Interest Period and ending on the last day of the period
selected by the Borrower pursuant to the provisions below. The duration
of each such Interest Period shall be two weeks or one, two, three or
six months (or such other period as may be approved by the
Administrative Agent), as the Borrower may, upon notice received by the
Administrative Agent not later than 11:00 A.M. (New York City time) on
the third Business Day prior to the first day of such Interest Period,
select; provided, however, that:

CERC 364-Day Revolving Credit Agreement

9

(i) the Borrower may not select any Interest
Period that ends after the Termination Date;

(ii) Interest Periods commencing on the same date for
Eurodollar Rate Advances comprising part of the same Revolving
Borrowing or for CAF Eurodollar Rate Advances comprising part
of the same CAF Borrowing shall be of the same duration;

(iii) whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the
last day of such Interest Period shall be extended to occur on
the next succeeding Business Day, provided, however, that, if
such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last
day of such Interest Period shall occur on the next preceding
Business Day; and

(iv) whenever the first day of any Interest Period
occurs on a day of an initial calendar month for which there
is no numerically corresponding day in the calendar month that
succeeds such initial calendar month by the number of months
equal to the number of months in such Interest Period, such
Interest Period shall end on the last Business Day of such
succeeding calendar month.

"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.

"Investment" in any Person means any loan or advance to such
Person, any purchase or other acquisition of any capital stock,
warrants, rights, options, other securities or all or substantially all
of the assets of such Person or any capital contribution to such Person
or any other investment in such Person.

"Junior Subordinated Debt" means subordinated debt of Borrower
or any Subsidiary of Borrower (i) that is issued at par to a Hybrid
Preferred Securities Subsidiary in connection with the issuance of
Hybrid Preferred Securities, (ii) the payment of the principal of which
and interest on which is subordinated (with certain exceptions) to the
prior payment in full in cash or its equivalent of all senior
indebtedness of the obligor thereunder and (iii) that has an original
tenor no earlier than 30 years from the issuance thereof.

"Lenders" means the Initial Lenders and each Person that shall
become a party hereto pursuant to Section 8.07.

"Loan Documents" means this Agreement, the Notes or CAF Notes
(if any) and all other documents executed in connection herewith and
therewith, including, without limitation, each Notice of Borrowing and
the Pledge Agreement upon execution and delivery of the same.

"Mandatory Payment Preferred Stock" means any preference or
preferred stock of the Borrower or of any Consolidated Subsidiary (in
each case other than any issued to the Borrower or its Subsidiaries and
other than Hybrid Preferred Securities or Junior Subordinated Debt)
that is subject to mandatory redemption, sinking fund or retirement
provisions; provided, that any amounts subject to any mandatory
redemption, sinking fund or retirement provisions due and payable prior
to the Termination Date or within one year following the Termination
Date will not be considered Mandatory Payment Preferred Stock.

"Material Adverse Change" means any material adverse change in
the business, condition (financial or otherwise), operations,
performance or properties of the Borrower or the Borrower and its
Subsidiaries taken as a whole.

"Material Adverse Effect" means a material adverse effect on
the ability of the Borrower to perform its obligations under this
Agreement or any other Loan Document.

"Moody's" means Moody's Investors Service, Inc.

"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA
Affiliate is making or accruing an obligation to make contributions, or
has within any of the preceding five plan years made or accrued an
obligation to make contributions.

"Multiple Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of the Borrower or any ERISA Affiliate and at least one
Person other than the Borrower and the ERISA Affiliates or (b) was so
maintained and in respect of which the Borrower or any ERISA Affiliate
could have liability under Section 4064 or 4069 of ERISA in the event
such plan has been or were to be terminated.

"Non-Recourse Debt" means (i) any Indebtedness for Borrowed
Money incurred by any Project Finance Subsidiary to finance the
acquisition, improvement, installation, design, engineering,
construction, development, completion, maintenance or operation of, or
otherwise to pay costs and expenses relating to or providing financing
for any project, which Indebtedness for Borrowed Money does not provide
for recourse against the Borrower or any Subsidiary of the Borrower
(other than a Project Finance Subsidiary and such recourse as exists
under a Performance Guaranty) or any property or asset of the Borrower
or any Subsidiary of the Borrower (other than Equity Interests in, or
the property or assets of, a Project Finance Subsidiary and such
recourse as exists under a Performance Guaranty) and (ii) any
refinancing of such Indebtedness for Borrowed Money that does not
increase the outstanding principal amount thereof (other than to pay
costs incurred in connection therewith and the capitalization of any
interest, fees, premium or penalties) at the time of the refinancing or
increase the property subject to any Lien securing such Indebtedness
for Borrowed Money or otherwise add additional security or support for
such Indebtedness for Borrowed Money.

"Note" means a promissory note of the Borrower payable to the
order of any Lender that has requested a Note pursuant to Section
2.18(a), in substantially the form of Exhibit A hereto, evidencing the
aggregate indebtedness of the Borrower to such Lender resulting from
the Revolving Advances made by such Lender.

"Notice" has the meaning specified in Section 8.02(c).

"Notice of Borrowing" has the meaning specified in Section
2.02.

"Obligation" means, with respect to any Person, any payment,
performance or other obligation of such Person of any kind, including,
without limitation, any liability of such Person on any claim, whether
or not the right of any creditor to payment in respect of such claim is
reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, disputed, undisputed, legal, equitable, secured or unsecured,
and whether or not claim is discharged, stayed or otherwise affected by
any proceeding referred to in Section 6.01(f). Without limiting the
generality of the foregoing, the Obligations of the Borrower under the
Loan Documents include (a) the obligation to pay principal, interest,
charges, expenses, fees, attorneys' fees and disbursements, indemnities
and other amounts payable by the Borrower under any Loan Document and
(b) the obligation of the Borrower to reimburse any amount in respect
of any of the foregoing that any Lender, in its sole discretion, may
elect to pay or advance on behalf of the Borrower.

"Performance Guaranty" means any guaranty issued in connection
with any Non-Recourse Debt that (i) if secured, is secured only by
assets of or Equity Interests in a Project Finance Subsidiary, and (ii)
guarantees to the provider of such Non-Recourse Debt or any other
Person (a) performance of the improvement, installation, design,
engineering, construction, acquisition, development, completion,
maintenance or operation of, or otherwise affects any such act in
respect of, all or any portion of the project that is financed by such
Non-Recourse Debt, (b) completion of the minimum agreed equity or other
contributions or support to the relevant Project Finance Subsidiary, or
(c) performance by a Project Finance Subsidiary of obligations to
Persons other than the provider of such Non-Recourse Debt.

"Permitted Liens" means

(a) mortgage Liens securing Indebtedness in an
aggregate amount which, together with all other Indebtedness
of the Company or a Subsidiary secured by a mortgage Lien
permitted by this clause (a) (not including Indebtedness
permitted to be secured under clauses (b)-(u) below) and the
Value of all Sale and Leaseback Transactions in existence at
such time (other than any Sale and Leaseback Transaction
which, if such Sale and Leaseback Transaction had been a Lien,
would have been permitted by clauses (k) or (m) below), does
not at the time of incurrence of such Indebtedness exceed 5%
of the Consolidated Net Tangible Assets;

(b) undetermined or inchoate Liens and charges
incidental to construction, maintenance, development or
operation;

(c) the Lien of taxes and assessments for the then
current year;

(d) the Lien of taxes and assessments not at the time
delinquent;

(e) the Lien of specified taxes and assessments which
are delinquent but the validity of which is being contested at
the time by the Borrower or such Subsidiary in good faith and
by appropriate proceedings or for which its non-payment would
not reasonably be expected to have a Material Adverse Effect;

(f) the Lien reserved in leases for rent and for
compliance with the terms of the lease in the case of
leasehold estates;

(g) any obligations or duties, affecting the property
of the Borrower or such Subsidiary, to any municipality or
public authority with respect to any franchise, grant,
license, permit or similar arrangement;

(h) the Liens of any judgments or attachments in an
aggregate amount not in excess of $5,000,000, or the Lien of
any judgment or attachment the execution or enforcement of
which has been stayed or which has been appealed and secured,
if necessary, by the filing of an appeal bond;

(i) any Lien on any property held or used by the
Borrower or a Subsidiary in connection with the exploration
for, development of or production of oil, gas, natural gas
(including liquefied gas and storage gas), other hydrocarbons,
helium, coal, metals, minerals, steam, timber, geothermal or
other natural resources or synthetic fuels, such properties to
include, but not be limited to, the Borrower's or a
Subsidiary's interest in any mineral fee interests, oil, gas
or other mineral leases, royalty, overriding royalty or net
profits interests, production payments and other similar
interests, wellhead production equipment, tanks, field
gathering lines, leasehold or field separation and processing
facilities, compression facilities and other similar personal
property and fixtures:

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(j) any Lien on oil, gas, natural gas (including
liquefied gas and storage gas), and other hydrocarbons,
helium, coal, metals, minerals, steam, timber, geothermal or
other natural resources or synthetic fuels produced or
recovered from any property, an interest in which is owned or
leased by the Borrower or a Subsidiary;

(k) Liens upon any property heretofore or hereafter
acquired, constructed or improved, created at the time of
acquisition or commercial operation thereof within one year
thereafter (and the accessions thereto and proceeds thereof)
to secure all or a portion of the purchase price thereof or
the cost of such construction or improvement, or existing
thereon at the date of acquisition or within one year
thereafter to secure all or a portion of the purchase price
thereof or the cost of such construction or improvement, or
existing thereon at the date of acquisition, whether or not
assumed by the Borrower or a Subsidiary, provided, that every
such Lien shall apply only to the property so acquired or
constructed and fixed improvements thereon (and the accessions
thereto and proceeds thereof);

(l) any extension, renewal or refunding, in whole or
in part, of any mortgage, pledge, Lien or encumbrance
permitted by subparagraph (k) above, if limited to the same
property or any portion thereof subject to, and securing not
more than the amount secured by, the mortgage, pledge, Lien or
encumbrance extended, renewed or refunded and related
transaction costs and expenses;

(m) Liens upon any property heretofore or hereafter
acquired by any Person that is or becomes a Subsidiary after
the date hereof ("Acquired Entity"), provided, that every such
Lien (1) shall either (A) exist prior to the time the Acquired
Entity becomes a Subsidiary or (B) be created at the time the
Acquired Entity becomes a Subsidiary or within one year
thereafter to secure all or a portion of the acquisition price
thereof and (2) shall only apply to those properties owned by
the Acquired Entity at the time it becomes a Subsidiary or
thereafter acquired by it from sources other than the Borrower
or any other Subsidiary;

(n) the pledge of current assets, in the ordinary
course of business, to secure current liabilities;

(o) mechanics' or materialmen's Liens, any Liens or
charges arising by reason of pledges or deposits to secure
payment of workmen's compensation or other insurance, good
faith deposits in connection with tenders, leases of real
estate, bids or contracts (other than contracts for the
payment of money), deposits to secure duties or public or
statutory obligations, deposits to secure, or in lieu of,
surety, stay or appeal bonds, and deposits as security for the
payment of taxes or assessments or similar charges;

(p) any Lien arising by reason of deposits with, or
the giving of any form of security to, any governmental
regulation for any purpose at any time in connection with the
financing of the acquisition or construction of property to be
used in the business of the Borrower or a Subsidiary or as
required by law or governmental regulation as a condition to
the transaction of any business or the exercise of any
privilege or license, or to enable the Borrower or a
Subsidiary to maintain self-insurance or to participate in any
funds established to cover any insurance risks or in
connection with workmen's compensation, unemployment
insurance, old age pensions or other social security, or to
share in the privileges or benefits required for companies
participating in such arrangements;

(r) any Lien created or assumed by the Borrower or a
Subsidiary in connection with the issuance of debt securities
the interest on which is excludable from gross income of the
holder of

CERC 364-Day Revolving Credit Agreement

13

such security pursuant to the Internal Revenue code, as
amended, for the purpose of financing, in whole or in part,
the acquisition or construction or property to be used by the
Borrower or a Subsidiary;

(s) the pledge or assignment of accounts receivable,
or the pledge or assignment of conditional sales contracts or
chattel mortgages and evidences of indebtedness secured
thereby, received in connection with the sale by the Borrower
or such Subsidiary or others of goods or merchandise to
customers of the Borrower or such Subsidiary;

(t) Liens granted to secure the obligations of the
Borrower under the Bridge Credit Agreement, provided, that the
Borrower grants to the Collateral Agent, for the benefit of
the Lenders, an equal and ratable security interest in any
collateral with respect to which such Lien is granted in
accordance with the Pledge Agreement substantially in the form
of Exhibit H hereto;

(u) Liens created in connection with the Receivables
Transaction;

(v) Liens granted to secure the obligations of the
Borrower under debt securities, the proceeds of which are used
to refinance the Bridge Credit Agreement, provided, that the
Borrower grants to the Collateral Agent, for the benefit of
the Lenders, an equal and ratable security interest in any
collateral with respect to which such Lien is granted in
accordance with the Pledge Agreement substantially in the form
of Exhibit H hereto;

(w) Liens granted to secure the obligations of the
Borrower under debt securities issued to refinance the
$500,000,000 bonds due November, 2003, provided, that the
Borrower grants to the Collateral Agent, for the benefit of
the Lenders, an equal and ratable security interest in any
collateral with respect to which such Lien is granted in
accordance with the Pledge Agreement substantially in the form
of Exhibit H hereto; or

(x) any other Liens securing obligations under
agreements to which the Borrower or any of its Subsidiaries is
a party or by which it is bound as of the date hereof, which
the Borrower is obligated to equally and ratably secure as a
result of granting the Liens to secure Indebtedness hereunder.

"Person" means an individual, partnership, corporation
(including a business trust), joint stock company, trust,
unincorporated association, joint venture, limited liability company or
other entity, or a government or any political subdivision or agency
thereof.

"Plan" means a Single Employer Plan or a Multiple Employer
Plan.

"Platform" has the meaning specified in Section 8.02(b).

"Pledge Agreement" means the Pledge Agreement to be entered
into by the Borrower in favor of the Collateral Agent at such time as
the Borrower executes and delivers the Bridge Credit Agreement in
substantially the form of Exhibit H hereto.

"Principal Property" means any natural gas distribution
property, natural gas pipeline or gas processing plant located in the
United States and all common stock Equity Interests in any Subsidiary
(other than a Project Finance Subsidiary) of the Borrower that owns any
natural gas distribution property, natural gas pipeline or gas
processing plant located in the United States, except any such property
and Equity Interests that in the reasonable opinion of the board of
directors of Borrower is not of material importance to the total
business conducted by the Borrower and its Consolidated Subsidiaries.
"Principal Property" shall not include any oil or gas property or the
production or proceeds of production from an oil or gas producing
property or the production or any proceeds of production of gas
processing plants or oil or gas or petroleum products in any pipeline
or storage field.

CERC 364-Day Revolving Credit Agreement

14

"Project Finance Subsidiary" and "Project Finance
Subsidiaries" means any Subsidiary of the Borrower designated by the
Borrower whose principal purpose is to incur Non-Recourse Debt and/or
construct, lease, own or operate the assets financed thereby, or to
become a direct or indirect partner, member or other equity participant
or owner in a Person created for such purpose, and substantially all
the assets of which Subsidiary or Person are limited to (x) those
assets being financed (or to be financed), or the operation of which is
being financed (or to be financed), in whole or in part by Non-Recourse
Debt, or (y) Equity Interests in, or Indebtedness or other obligations
of, one or more other such Subsidiaries or Persons, or (z) Indebtedness
or other obligations of the Borrower or its Subsidiaries or other
Persons; provided, however, that the sum of the net book value of all
Project Finance Subsidiaries shall at no time exceed 10% of
Consolidated Net Tangible Assets.

"Property" means any interest or right in any kind of property
or asset, whether real, personal or mixed, owned or leased, tangible or
intangible and whether now held or hereafter acquired.

"Public Debt Rating" means, as of any date, the lowest rating
that has been most recently announced by either S&P or Moody's, as the
case may be, for any class of non-credit enhanced long-term senior
unsecured debt issued by the Borrower. For purposes of the foregoing,
(a) if only one of S&P and Moody's shall have in effect a Public Debt
Rating, the Applicable Margin and the Applicable Percentage shall be
determined by reference to the available rating; (b) if the ratings
established by S&P and Moody's shall fall within different levels, the
Applicable Margin and the Applicable Percentage shall be based upon the
lower rating; (c) if any rating established by S&P or Moody's shall be
changed, such change shall be effective as of the date on which such
change is first announced publicly by the rating agency making such
change; and (d) if S&P or Moody's shall change the basis on which
ratings are established, each reference to the Public Debt Rating
announced by S&P or Moody's, as the case may be, shall refer to the
then equivalent rating by S&P or Moody's, as the case may be.

"Receivables Transaction" means the Receivables Contribution
and Sale Agreement, dated as of November 15, 2002 among various
Affiliates of the Borrower, as sellers, and CenterPoint Energy Gas
Receivables, LLC or another Person, as buyer, together with the Second
Amended and Restated Trade Receivables Purchase and Sale Agreement,
dated as of November 15, 2002 among CenterPoint Energy Gas Receivables,
LLC, as the seller, the Borrower, as the servicer, Corporate Asset
Funding Company, Inc., as the purchaser and Citicorp North America,
Inc., as the Administrative Agent, and related agreements (as each such
agreement may be amended, supplemented, or otherwise modified from time
to time, or replaced, refunded, refinanced).

"Register" has the meaning specified in Section 8.07(c).

"Regulation T" and "Regulation U" means Regulation T and U,
respectively, of the Board or any other regulation hereafter
promulgated by the Board to replace the prior Regulation T or U, as the
case may be, and having substantially the same function.

"Required Lenders" means at any time Lenders owed at least 51%
of the then aggregate unpaid principal amount of the Advances owing to
the Lenders, or, if no such principal amount is then outstanding,
Lenders having at least 51% of the Commitments.

"Responsible Officer" means, with respect to any Person, its
chief financial officer, chief accounting officer, assistant treasurer,
treasurer or comptroller of such Person or any other officer of such
Person whose primary duties are similar to the duties of any of the
previously listed officers of such Person.

"Restricted Subsidiary" means any Subsidiary of the Borrower
which owns Principal Property.

"Revolving Advances" has the meaning as set forth in Section
2.01.

"Revolving Borrowing" means a borrowing consisting of
Revolving Advances of the same Type, made by the Lenders on the same
day under Section 2.02.

CERC 364-Day Revolving Credit Agreement

15

"Revolving Extensions of Credit" means, as to any Lender at
any time, an amount equal to the aggregate principal amount of all
Revolving Advances held by such Lender then outstanding.

"Revolving Facility" has the meaning as set forth in Section
2.01.

"Sale and Leaseback Transaction" means any arrangement with
any Person providing for the leasing to the Borrower or any Restricted
Subsidiary of any Principal Property (except for temporary leases for a
term, including any renewal thereof of not more than three years and
except for leases between the Borrower and a Restricted Subsidiary or
between Restricted Subsidiaries), which Principal Property has been or
is to be sold or transferred by the Borrower or any Restricted
Subsidiary to such Person.

"Significant Subsidiary" means (i) for the purposes of
determining what constitutes an "Event of Default" under Sections
6.01(d), (e), (f) and (g), a Subsidiary of the Borrower (other than a
Project Finance Subsidiary) whose total assets, as determined in
accordance with GAAP, represent at least 10% of the total assets of the
Borrower, on a consolidated basis, as determined in accordance with
GAAP and (ii) for all other purposes the "Significant Subsidiaries"
shall be those Subsidiaries whose total assets, as determined in
accordance with GAAP, represent at least 10% of the total assets of the
Borrower on a consolidated basis, as determined in accordance with GAAP
for the Borrower's most recently completed fiscal year and identified
in the certificate most recently delivered pursuant to Section
5.01(j)(ii).

"Single Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of the Borrower or any ERISA Affiliate and no Person other
than the Borrower and the ERISA Affiliates or (b) was so maintained and
in respect of which the Borrower or any ERISA Affiliate could have
liability under Section 4069 of ERISA in the event such plan has been
or were to be terminated.

"Solvent" means, with respect to any Person on a particular
date, that on such date (a) the fair value of the property of such
Person is greater than the total amount of liabilities, including,
without limitation, contingent liabilities, of such Person, (b) the
present fair salable value of the assets of such Person is not less
than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured, (c) such
Person does not intend to, and does not believe that it will, incur
debts or liabilities beyond such Person's ability to pay such debts and
liabilities as they mature and (d) such Person is not engaged in
business or a transaction, and is not about to engage in business or a
transaction, for which such Person's property would constitute an
unreasonably small capital. The amount of contingent liabilities at any
time shall be computed as the amount that, in the light of all the
facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured
liability.

"Subsidiary" of any Person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or
in which) more than 50% of (a) the issued and outstanding capital stock
having ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether at the time
capital stock of any other class or classes of such corporation shall
or might have voting power upon the occurrence of any contingency), (b)
the interest in the capital or profits of such limited liability
company, partnership, joint venture or other Person or (c) the
beneficial interest in such trust or estate is at the time directly or
indirectly owned or controlled by such Person, by such Person and one
or more of its other Subsidiaries or by one or more of such Person's
other Subsidiaries.

"Termination Date" means the earlier of March 23, 2004 and the
date of termination in whole of the Commitments pursuant to Section
2.06 or 6.01.

"Total Aggregate Outstanding Extensions of Credit" means, at
any time, the aggregate amount of Aggregate Outstanding Extensions of
Credit of all Lenders outstanding at such time.

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16

"Total Commitments" means, at any time, the aggregate amount
of the Commitments of all Lenders then in effect.

"Total Debt" means, as of any date of determination, the sum
of (i) the total Indebtedness for Borrowed Money as shown on the
consolidated balance sheet of Borrower and its Consolidated
Subsidiaries, determined without duplication of any Guarantee of
Indebtedness for Borrowed Money of Borrower by any of its Consolidated
Subsidiaries or of any Guarantee of Indebtedness of any such
Consolidated Subsidiary by Borrower or any other Consolidated
Subsidiary of Borrower, and any Mandatory Payment Preferred Stock, less
(ii) such amount of Indebtedness for Borrowed Money attributable to
amounts then outstanding under receivables facilities or arrangements
to the extent that such amount would not have been shown as
Indebtedness for Borrowed Money on a balance sheet prepared in
accordance with GAAP prior to January 1, 1997, less (iii) with respect
to any Indexed Debt Securities that are Fully Hedged and the
liabilities in respect of which as shown on the consolidated balance
sheet of Borrower and its Consolidated Subsidiaries have increased from
the amount of liabilities in respect thereof at the time of their
issuance by reason of an increase in the price of the Indexed Asset
relating thereto, the excess of (a) the aggregate amount of liabilities
in respect of such Indexed Debt Securities at the time of determination
over (b) the initial amount of liabilities in respect of such Indexed
Debt Securities at the time of their issuance, provided that at the
time of determination such increase in the price of the Indexed Asset
relating to such Indexed Debt Securities has not been recorded on such
consolidated balance sheet, less (iv) funds segregated to repay bonds
maturing in November, 2003, and less (v) Non-Recourse Debt of the
Borrower and its Subsidiaries.

"Type" has the meaning as set forth in the definition of
"Advance".

"Value" means, with respect to a Sale and Leaseback
Transaction, as of any particular time, the amount equal to the greater
of (1) the net proceeds from the sale or transfer of the property
leased pursuant to such Sale and Leaseback Transaction or (2) the fair
value, in the opinion of the board of directors, of such property at
the time of entering into such Sale and Leaseback Transaction, in
either case divided first by the number of full years of the term of
the lease and then multiplied by the number of full years of such term
remaining at the time of determination, without regard to any renewal
or extension options contained in the lease.

"Voting Stock" means capital stock issued by a corporation, or
equivalent interests in any other Person, the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for the
election of directors (or persons performing similar functions) of such
Person, even if the right so to vote has been suspended by the
happening of such a contingency.

"Wholly-Owned" means, with respect to any Subsidiary of any
Person, a Subsidiary, all the outstanding capital stock (other than
directors' qualifying shares required by law) or other ownership
interest of which are at the time owned by such Person or by one or
more Wholly-Owned Subsidiaries of such Person, or both.

SECTION 1.02. Computation of Time Periods. In this Agreement
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding".

SECTION 1.03. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles in effect from time to time in the United States
of America ("GAAP").

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ARTICLE II

AMOUNTS AND TERMS OF THE ADVANCES

SECTION 2.01. The Revolving Advances. Each Lender severally
agrees, on the terms and conditions hereinafter set forth, to make advances to
the Borrower (the "Revolving Advances") from time to time on any Business Day
during the period from the Effective Date until the Termination Date in an
aggregate amount not to exceed at any time outstanding the amount set forth
opposite such Lender's name on the signature pages hereof or, if such Lender has
entered into any Assignment and Acceptance, set forth for such Lender in the
Register maintained by the Administrative Agent pursuant to Section 8.07(c), as
such amount may be reduced pursuant to Section 2.06 (such Lender's "Commitment",
and, in the aggregate, the "Revolving Facility"). Each Revolving Borrowing, in
the case of a Revolving Borrowing consisting of Eurodollar Rate Advances, shall
be in minimum principal aggregate amounts of $5,000,000 or an integral multiple
of $1,000,000 in excess thereof, or in the case of a Revolving Borrowing
consisting of Base Rate Advances, shall be in minimum principal aggregate
amounts of $5,000,000 or an integral multiple of $1,000,000 in excess thereof,
and shall consist of Revolving Advances of the same Type made on the same day by
the Lenders ratably according to their respective Commitments. Within the limits
of each Lender's Commitment, the Borrower may borrow under this Section 2.01,
prepay pursuant to Section 2.11 and reborrow under this Section 2.01.

SECTION 2.02. Making the Revolving Advances. (a) Each
Revolving Borrowing shall be made on notice, given not later than 11:00 A.M.
(New York City time) on the third Business Day prior to the date of the proposed
Revolving Borrowing in the case of a Revolving Borrowing consisting of
Eurodollar Rate Advances, or on the same Business Day as the date of the
proposed Revolving Borrowing in the case of a Revolving Borrowing consisting of
Base Rate Advances, by the Borrower to the Administrative Agent, which shall
give to each Lender prompt notice thereof by telecopier or telex. Each such
notice of a Revolving Borrowing (a "Notice of Borrowing") shall be by telephone,
confirmed immediately in writing, or telecopier or telex, in substantially the
form of Exhibit B hereto, specifying therein the requested (i) date of such
Revolving Borrowing, (ii) Type of Revolving Advances comprising such Revolving
Borrowing, (iii) aggregate amount of such Revolving Borrowing, (iv) in the case
of a Revolving Borrowing consisting of Eurodollar Rate Advances, initial
Interest Period for each such Revolving Advance and (v) whether any of such
Revolving Borrowing shall be used by the Borrower to repay commercial paper.
Each Lender shall, before 11:00 A.M. (New York City time) on the date of such
Revolving Borrowing, in the case of a Revolving Borrowing consisting of
Eurodollar Rate Advances, or before 3:00 P.M. (New York City time) in the case
of a Revolving Borrowing consisting of Base Rate Advances, make available for
the account of its Applicable Lending Office to the Administrative Agent at the
Administrative Agent's Account, in same day funds, such Lender's ratable portion
of such Revolving Borrowing. After the Administrative Agent's receipt of such
funds and upon fulfillment of the applicable conditions set forth in Article
III, the Administrative Agent will make such funds available to the Borrower at
the Administrative Agent's address referred to in Section 8.02 no later than
12:00 P.M. (New York City time) on such date, in the case of a Revolving
Borrowing consisting of Eurodollar Rate Advances, or 4:00 P.M. (New York City
time) on such date, in the case of a Revolving Borrowing consisting of Base Rate
Advances.

(b) Anything in subsection (a) above to the contrary notwithstanding,
(i) the Borrower may not select Eurodollar Rate Advances for any Revolving
Borrowing if the aggregate amount of such Revolving Borrowing is less than
$5,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances
shall then be suspended pursuant to Section 2.09 or 2.13 and (ii) the Eurodollar
Rate Advances may not be outstanding as part of more than twelve separate
Revolving Borrowings.

(c) Each Notice of Borrowing shall be irrevocable and binding on the
Borrower. In the case of any Revolving Borrowing that the related Notice of
Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower
shall indemnify each Lender against any loss, cost or expense incurred by such
Lender as a result of any failure to fulfill on or before the date specified in
such Notice of Borrowing for such Revolving Borrowing the applicable conditions
set forth in Article III, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such Lender to fund the Revolving Advance to be made by
such Lender as part of such Revolving Borrowing when such Revolving Advance, as
a result of such failure, is not made on such date.

CERC 364-Day Revolving Credit Agreement

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(d) Unless the Administrative Agent shall have received notice from a
Lender prior to the date of any Revolving Borrowing that such Lender will not
make available to the Administrative Agent such Lender's ratable portion of such
Revolving Borrowing, the Administrative Agent may assume that such Lender has
made such portion available to the Administrative Agent on the date of such
Revolving Borrowing in accordance with subsection (a) of this Section 2.02 and
the Administrative Agent may, in reliance upon such assumption, make available
to the Borrower on such date a corresponding amount. If and to the extent that
such Lender shall not have so made such ratable portion available to the
Administrative Agent, such Lender and the Borrower severally agree to repay to
the Administrative Agent forthwith on demand such corresponding amount together
with interest thereon, for each day from the date such amount is made available
to the Borrower until the date such amount is repaid to the Administrative
Agent, at (i) in the case of the Borrower, the interest rate applicable at the
time to Revolving Advances comprising such Revolving Borrowing and (ii) in the
case of such Lender, the Federal Funds Rate. If such Lender shall repay to the
Administrative Agent such corresponding amount, such amount so repaid shall
constitute such Lender's Revolving Advance as part of such Revolving Borrowing
for purposes of this Agreement.

(e) The failure of any Lender to make the Revolving Advance to be made
by it as part of any Revolving Borrowing shall not relieve any other Lender of
its obligation, if any, hereunder to make its Revolving Advance on the date of
such Revolving Borrowing, but no Lender shall be responsible for the failure of
any other Lender to make the Revolving Advance to be made by such other Lender
on the date of any Revolving Borrowing.

SECTION 2.03. The CAF Advances. (a) From time to time on any
Business Day during the period from the Effective Date until the Termination
Date, the Borrower may request CAF Advances from the Lenders in amounts such
that the Total Aggregate Outstanding Extensions of Credit at any time shall not
exceed the Total Commitments at such time (the "CAF Facility").

(b) Under the terms and conditions set forth below, the Borrower may
borrow, repay pursuant to Section 2.07 and reborrow under this Section 2.03.

SECTION 2.04. Competitive Bid Procedure. (a) In order to
request a CAF Advance, the Borrower shall deliver to the Administrative Agent a
written notice in the form of Exhibit E, attached hereto (a "Competitive Bid
Request"), to be received by the Administrative Agent (i) in the case of each
CAF Eurodollar Rate Advance, not later than 3:00 P.M. (New York City time), four
(4) Business Days before the Borrowing Date specified for such CAF Eurodollar
Rate Advance and (ii) in the case of each Fixed Rate Advance, not later than
11:00 A.M. (New York City time), one (1) Business Day before the Borrowing Date
specified for such Fixed Rate Advance. Each Competitive Bid Request shall in
each case refer to this Agreement and specify (i) the date of Borrowing of such
CAF Advances (which shall be a Business Day), (ii) the aggregate principal
amount thereof, (iii) whether the CAF Advances then being requested are to be
CAF Eurodollar Rate Advances or Fixed Rate Advances, (iv) the maturity date for
each CAF Advance requested to be made and (v) the interest payment dates for
each CAF Advance requested to be made. The Administrative Agent shall promptly
notify each Lender by telex or facsimile transmission of the contents of each
Competitive Bid Request received by it. Each Competitive Bid Request may solicit
bids for CAF Advances in an aggregate principal amount of $5,000,000 or an
integral multiple of $1,000,000 in excess thereof and for not more than three
alternative maturity dates for such CAF Advances. The maturity date for each CAF
Advance shall be not less than 15 days nor more than 180 days after the
applicable date of CAF Borrowing (and in any event shall not extend beyond the
Termination Date).

(b) Each Lender may, in its sole discretion, irrevocably offer to make
one or more CAF Advances to the Borrower responsive to each Competitive Bid
Request from the Borrower. Any such irrevocable offer by a Lender must be
received by the Administrative Agent, in the form of Exhibit F hereto (a
"Competitive Bid"), (i) in the case of each CAF Eurodollar Rate Advance, not
later than 10:30 A.M. (New York City time), three (3) Business Days before the
Borrowing Date specified for such CAF Eurodollar Rate Advance and (ii) in the
case of each Fixed Rate Advance, not later than 9:30 A.M. (New York City time)
on the Borrowing Date specified for such Fixed Rate Advance. Competitive Bids
that do not conform substantially to the format of Exhibit F may be rejected by
the Administrative Agent after conferring with, and upon the instruction of, the
Borrower, and the Administrative Agent shall notify the Lender of such rejection
as soon as practicable. Each Competitive Bid shall refer to this Agreement and
(i) specify the maximum principal amount of CAF Advances for each maturity date
(which shall be in an aggregate principal amount not less than $5,000,000 or an
integral multiple of $1,000,000 in excess thereof and which may equal, but not
exceed, the principal amount requested for such maturity date by the Borrower)
and the

CERC 364-Day Revolving Credit Agreement

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aggregate maximum principal amount of CAF Advances for all maturity dates (which
amount, with respect to any Lender, may exceed such Lender's Commitment) that
the Lender is willing to make to the Borrower, and (ii) specify the CAF Rate at
which the Lender is prepared to make each such CAF Advance. A Competitive Bid
submitted by a Lender pursuant to this Section 2.04(b) shall be irrevocable
absent manifest error.

(c) The Administrative Agent shall (i) in the case of each CAF
Eurodollar Rate Advance, not later than 11:00 A.M. (New York City time) three
(3) Business Days before the Borrowing Date specified for such CAF Eurodollar
Rate Advance and (ii) in the case of each Fixed Rate Advance, not later than
10:00 A.M. (New York City time) on the Borrowing Date specified for such Fixed
Rate Advance, notify the Borrower in writing of all the Competitive Bids made
(arranging each such bid in ascending interest rate order), and the CAF Rate or
Rates and the maximum principal amount of each CAF Advance in respect of which a
Competitive Bid was made, and the identity of the Lender that made each bid. The
Administrative Agent shall send a copy of all Competitive Bids to the Borrower
for its records as soon as practicable after completion of the bidding process
set forth in this Section 2.04.

(d) The Borrower may in its sole and absolute discretion, subject only
to the provisions of this Section 2.04(d), accept or reject any Competitive Bid
referred to in Section 2.04(c); provided, however, that the aggregate amount of
the Competitive Bids for CAF Advances so accepted by the Borrower may not exceed
the lesser of (i) the principal amount of the applicable CAF Borrowing requested
by the Borrower in respect thereof and (ii) the amount of the Commitments less
the Total Aggregate Outstanding Extensions of Credit then outstanding, after
giving effect to the application of the proceeds of such respective CAF
Borrowing on the Borrowing Date therefor. The Borrower shall notify the
Administrative Agent in writing whether and to what extent it has decided to
accept or reject any or all of the bids referred to in Section 2.04(c) by
delivering to the Administrative Agent a written notice in the form of Exhibit G
hereto (a "Competitive Bid Confirmation"), (i) in the case of each CAF
Eurodollar Rate Advance, not later than 1:00 P.M. (New York City time), three
(3) Business Days before the Borrowing Date specified for such CAF Eurodollar
Rate Advance and (ii) in the case of each Fixed Rate Advance, not later than
11:00 A.M. (New York City time) on the Borrowing Date specified for such Fixed
Rate Advance, which Competitive Bid Confirmation shall specify the principal
amount of CAF Advances for each relevant maturity date to be made by each such
bidding Lender (which amount for each such maturity date shall be equal to or
less than the maximum amount for such maturity date specified in the Competitive
Bid of such Lender, and for all maturity dates included in such Competitive Bid
in respect thereof shall be equal to or less than the aggregate maximum amount
specified in such Competitive Bid for all such maturity dates); provided,
however, that (A) the failure by the Borrower to so deliver a Competitive Bid
Confirmation by the specified time shall be deemed to be a rejection of all the
bids referred to in Section 2.04(c) for the related Competitive Bid Request; (B)
the Borrower shall not accept a bid made at a particular CAF Rate for a
particular maturity if the Borrower has decided to reject a bid made at a lower
CAF Rate for such maturity; (C) if the Borrower shall accept bids made at a
particular CAF Rate for a particular maturity but shall be restricted by other
conditions hereof from borrowing the maximum principal amount of CAF Advances in
respect of which bids at such CAF Rate have been made, then the Borrower shall
accept a pro rata portion of each bid made at such CAF Rate based as nearly as
possible on the respective maximum principal amounts of CAF Advances offered to
be made by the relevant Lenders pursuant to such bids; and (D) no bid shall be
accepted for a CAF Advance by any Lender unless such CAF Advance is in an
aggregate principal amount not less than $5,000,000 or an integral multiple of
$1,000,000 in excess thereof. Notwithstanding the foregoing, if it is necessary
for the Borrower to accept a pro rata allocation of the bids made in response to
a Competitive Bid Request (whether pursuant to the events specified in clause
(C) above or otherwise) and the available principal amount of CAF Advances to be
allocated among the Lenders is not sufficient to enable CAF Advances to be
allocated to each Lender in an aggregate principal amount not less than
$5,000,000 or in integral multiples of $1,000,000 in excess thereof, then the
Borrower shall, subject to clause (D) above, select the Lenders to be allocated
such CAF Advances and shall round allocations up or down to the next higher or
lower multiple of $1,000,000 as it shall deem appropriate; provided that the
allocations among the Lenders to be allocated such CAF Advances shall be made
pro rata based as nearly as possible on the respective maximum principal amounts
of CAF Advances offered to be made by such Lenders. The Competitive Bid
Confirmation given by the Borrower pursuant to this Section 2.04(d) shall be
irrevocable.

(e) Upon receipt from the Administrative Agent of the Eurodollar Rate
applicable to any CAF Eurodollar Rate Advance to be made by any Lender pursuant
to a Competitive Bid that has been accepted by the Borrower pursuant to this
Section 2.04, the Administrative Agent shall notify such Lender of the
applicable Eurodollar Rate.

CERC 364-Day Revolving Credit Agreement

20

(f) If the Administrative Agent shall at any time elect to submit a
Competitive Bid in its capacity as a Lender, it shall submit such bid directly
to the Borrower by (i) in the case of a CAF Eurodollar Rate Advance, not later
than 10:15 A.M. (New York City time), and (ii) in the case of a Fixed Rate
Advance, not later than 9:15 A.M. (New York City time), in each case, on the
Business Day on which the other Lenders are required to submit their bids to the
Administrative Agent pursuant to Section 2.04(b) above.

(g) If the Borrower accepts pursuant to Section 2.04(d) one or more of
the offers made by any Lender or Lenders, the Administrative Agent shall
promptly notify each Lender that has made such an offer of the aggregate amount
of such CAF Advances to be made on the Borrowing Date for each maturity date and
of the acceptance or rejection of any offers to make such CAF Advances made by
such Lender. Each Lender that is to make a CAF Advance shall, before 12:00 Noon
(New York City time) on the Borrowing Date specified in the Competitive Bid
Request applicable thereto, make available to the Administrative Agent at its
office set forth in Section 8.02 the amount of CAF Advances to be made by such
Lender, in immediately available funds. The Administrative Agent shall, no later
than 1:00 P.M. (New York City time) on such Borrowing Date, make such funds
available to the Borrower at the Borrower's account as shall be designated by it
to the Administrative Agent from time to time. As soon as practicable after each
Borrowing Date, the Administrative Agent shall notify each Lender of the
aggregate amount of CAF Advances advanced on such Borrowing Date and the
respective maturity dates thereof.

(h) The Borrower shall repay to the Administrative Agent for the
account of each Lender that has made a CAF Advance (or the Eligible Assignee in
respect thereof, as the case may be) on the maturity date of each CAF Advance
(such maturity date being that specified by the Borrower for repayment of such
CAF Advance in the related Competitive Bid Request) the then unpaid principal
amount of such CAF Advance. The Borrower shall not, without the consent of the
relevant Lender, have the right to prepay, at its option, any principal amount
of any CAF Advance.

All notices required by this Section 2.04 shall be made in accordance with
Section 8.02 hereof; provided, however, that each request or notice required to
be made under Section 2.04(a) or 2.04(d) by the Borrower may be made by the
giving of telephone notice to the Administrative Agent that is promptly
confirmed by delivery of a notice in writing (in substantially the form of
Exhibit B or Exhibit E, as the case may be) to the Administrative Agent.

SECTION 2.05. Fees. (a) Facility Fee. The Borrower agrees to
pay to the Administrative Agent for the account of each Lender a facility fee on
the aggregate amount of such Lender's Commitment, irrespective of usage, from
the Effective Date in the case of each Initial Lender and from the effective
date specified in the Assignment and Acceptance pursuant to which it became a
Lender in the case of each other Lender until the Termination Date at a rate per
annum equal to the Applicable Percentage in effect from time to time, payable in
arrears quarterly on the last day of each March, June, September and December,
commencing June 30, 2003, and on the Termination Date.

(b) Agents' Fees. The Borrower shall pay to each Agent for its own
account such fees as may from time to time be agreed between the Borrower and
such Agent.

SECTION 2.06. Termination or Reduction of the Commitments. The
Borrower shall have the right, upon at least three Business Days' notice to the
Administrative Agent, to terminate in whole or permanently reduce ratably in
part the unused portions of the respective Commitments of the Lenders, provided
that (i) each partial reduction shall be in a minimum aggregate amount of
$10,000,000 or an integral multiple of $1,000,000 in excess thereof and (ii) no
such termination or reduction shall be permitted if, after giving effect thereto
and to any prepayments made under Section 2.11 by the Borrower on the effective
date thereof, the Total Aggregate Outstanding Extensions of Credit then
outstanding would exceed the Total Commitments then in effect. Any terminated or
permanently reduced portion of the respective Commitments of the Lenders may not
be reinstated.

Each reduction of Commitments pursuant to this Section 2.06
shall be applied pro rata to the Commitments of each Lender. If at any time,
including after giving effect to any reduction of Commitments pursuant to this
Section 2.06, the Total Aggregate Outstanding Extensions of Credit exceed the
Total Commitments, the Borrower shall be obligated, first, to prepay the
Revolving Advances in the amount of such excess and second, to prepay the CAF
Advances (whether or not consented to by the relevant Lender) to the extent that
the aggregate amount of CAF Advances exceeds such Total Commitments after
prepayment of all Revolving Advances.

CERC 364-Day Revolving Credit Agreement

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SECTION 2.07. Repayment. The Borrower shall repay to the
Administrative Agent for the ratable account of the Lenders on the Termination
Date the aggregate principal amount of the Revolving Advances then outstanding.

SECTION 2.08. Interest. (a) Scheduled Interest. The Borrower
shall pay interest on the unpaid principal amount of each Revolving Advance
owing to each Lender from the date of such Revolving Advance to but excluding
the date such principal amount shall be paid in full, at the following rates per
annum:

(i) Base Rate Advances. During such periods as such Revolving
Advance is a Base Rate Advance, a rate per annum equal at all times to
the sum of (x) the Base Rate in effect from time to time plus (y) the
Applicable Margin in effect from time to time, payable in arrears
quarterly on the last day of each March, June, September and December,
during such periods and on the date such Base Rate Advance shall be
Converted or paid in full.

(ii) Eurodollar Rate Advances. During such periods as such
Advance is a Revolving Advance bearing interest at the Eurodollar Rate,
a rate per annum equal at all times during each Interest Period for
such Revolving Advance to the sum of (x) the Eurodollar Rate for such
Interest Period for such Revolving Advance plus (y) the Applicable
Margin in effect from time to time, payable in arrears on the last day
of such Interest Period and, if such Interest Period has a duration of
more than three months, on each day that occurs during such Interest
Period every three months from the first day of such Interest Period
and on the date such Eurodollar Rate Advance shall be Converted or paid
in full.

(iii) CAF Eurodollar Rate Advances. In the case of each CAF
Eurodollar Rate Advance, a rate per annum equal at all times to the sum
of the Eurodollar Rate applicable to such CAF Advance plus or minus, as
the case may be, the CAF Margin specified by a Lender with respect to
such CAF Advance in its Competitive Bid submitted pursuant to Section
2.04(b), payable on the date or dates specified in the relevant
Competitive Bid Request.

(b) Default Interest. Upon the occurrence and during the continuance of
any default in the payment of any amount owed hereunder, the Administrative
Agent may, and upon the request of the Required Lenders shall, require the
Borrower to pay interest ("Default Interest") on (i) the unpaid principal amount
of each Revolving Advance past due and owing to each Lender, payable in arrears
on the dates referred to in clause (a)(i) or (a)(ii) above, at a rate per annum
equal at all times to 2.00% per annum above the rate per annum required to be
paid on such Revolving Advance pursuant to clause (a)(i), (a)(ii) or (a)(iii)
above and (ii) to the fullest extent permitted by law, the amount of any
interest, fee or other amount payable hereunder that is not paid when due, from
the date such amount shall be due until such amount shall be paid in full,
payable in arrears on the date such amount shall be paid in full and on demand,
at a rate per annum equal at all times to 2.00% per annum above the rate per
annum required to be paid on Base Rate Advances pursuant to clause (a)(i) above;
provided, however, that following acceleration of the Advances pursuant to
Section 6.01, Default Interest shall accrue and be payable hereunder whether or
not previously required by the Administrative Agent.

SECTION 2.09. Interest Rate Determination. (a) The
Administrative Agent shall give prompt notice to the Borrower and the Lenders of
the applicable interest rate determined by the Administrative Agent for purposes
of Section 2.08(a)(i), (ii) or (iii).

(b) If, with respect to any Eurodollar Rate Advances, the Required
Lenders notify the Administrative Agent that the Eurodollar Rate for any
Interest Period for such Revolving Advances will not adequately reflect the cost
to such Required Lenders of making, funding or maintaining their respective
Eurodollar Rate Advances for such Interest Period, the Administrative Agent
shall forthwith so notify the Borrower and the Lenders, whereupon (i) each
Eurodollar Rate Advance will automatically, on the last day of the then existing
Interest Period therefor, Convert into a Base Rate Advance, and (ii) the
obligation of the Lenders to make, or to Convert Revolving Advances into,
Eurodollar Rate Advances shall be suspended until the Administrative Agent shall
notify the Borrower and the Lenders that the circumstances causing such
suspension no longer exist.

(c) If the Borrower shall fail to select the duration of any Interest
Period for any Eurodollar Rate Advances in accordance with the provisions
contained in the definition of "Interest Period" in Section 1.01, the
Administrative

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Agent will forthwith so notify the Borrower and the Lenders and such Revolving
Advances will automatically, on the last day of the then existing Interest
Period therefor, Convert into Base Rate Advances. If no Advances are outstanding
at the time of delivery of a Notice of Borrowing with respect to Eurodollar Rate
Advances and the Borrower shall fail to select an Interest Period for such
Advances, such Advances shall be made as Base Rate Advances.

(d) On the date on which the aggregate unpaid principal amount of
Eurodollar Rate Advances comprising any Revolving Borrowing shall be reduced, by
payment or prepayment or otherwise, to less than $5,000,000, such Revolving
Advances shall automatically Convert into Base Rate Advances.

(e) Upon the occurrence and during the continuance of any Event of
Default under Section 6.01(a), (i) each Eurodollar Rate Advance will
automatically, on the last day of the then existing Interest Period therefor,
Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make,
or to Convert Revolving Advances into, Eurodollar Rate Advances shall be
suspended.

SECTION 2.10. Optional Conversion of Revolving Advances. The
Borrower may on any Business Day, upon notice given to the Administrative Agent
not later than 11:00 A.M. (New York City time) on the third Business Day prior
to the date of the proposed Conversion and subject to the provisions of Sections
2.09 and 2.13, Convert all Revolving Advances of one Type comprising the same
Borrowing into Revolving Advances of the other Type; provided, however, that any
Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made
only on the last day of an Interest Period for such Eurodollar Rate Advances,
any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in
an amount not less than the minimum amount specified in Section 2.02(b) and no
Conversion of any Revolving Advances shall result in more separate Borrowings
than permitted under Section 2.02(b). Each such notice of a Conversion shall,
within the restrictions specified above, specify (i) the date of such
Conversion, (ii) the Revolving Advances to be Converted, and (iii) if such
Conversion is into Eurodollar Rate Advances, the duration of the initial
Interest Period for each such Revolving Advance. Each notice of Conversion shall
be irrevocable and binding on the Borrower.

SECTION 2.11. Prepayments of Revolving Advances. (a) Optional
Prepayments. The Borrower may, upon at least two Business Days' notice to the
Administrative Agent, in the case of a Revolving Borrowing consisting of
Eurodollar Rate Advances, or upon same day notice to the Administrative Agent,
in the case of a Revolving Borrowing consisting of Base Rate Advances, stating
the proposed date and aggregate principal amount of the prepayment, and if such
notice is given the Borrower shall, prepay the outstanding principal amount of
the Revolving Advances comprising part of the same Revolving Borrowing in whole
or ratably in part, together with accrued interest to the date of such
prepayment on the principal amount prepaid; provided, however, that (x) each
partial prepayment shall be in a minimum aggregate principal amount of
$10,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in
the event of any such prepayment of a Eurodollar Rate Advance, the Borrower
shall be obligated to reimburse the Lenders in respect thereof pursuant to
Section 8.04(c).

(b) Mandatory Prepayments from Excess Cash Flow. The Borrower
shall, on the day the Borrower files its Form 10-Q or Form 10-K, but not later
than 45 days following the end of each calendar quarter (the "Prepayment Date"
and the "Reference Quarter", respectively), prepay an aggregate principal amount
of the Revolving Advances comprising part of the same Revolving Borrowings in an
amount sufficient to cause the aggregate principal amount of all Advances
outstanding as of the Prepayment Date to equal the aggregate principal amount of
all Advances outstanding as of the first day of the Reference Quarter, less the
amount of Excess Cash Flow for the Reference Quarter. Amounts prepaid under this
Section 2.11(b) shall be available to be reborrowed on the following Business
Day, provided that all other conditions to such Borrowing under this Agreement
are met.

SECTION 2.12. Increased Costs. (a) If, after the date hereof,
due to either (i) the introduction of or any change in or in the interpretation
of any law or regulation or (ii) the compliance with any guideline or request
from any central bank or other governmental authority (whether or not having the
force of law), there shall be any increase in the cost to any Lender of agreeing
to make or making, funding or maintaining Eurodollar Rate Advances or CAF
Eurodollar Rate Advances (excluding for purposes of this Section 2.12 any such
increased costs resulting from (A) Taxes or Other Taxes (as to which Section
2.15 shall govern), (B) net income taxes and franchise taxes imposed on such
Lender as a result of a present or former connection between the jurisdiction of
the government or taxing authority imposing such tax and such Lender other than
a connection arising solely from such Lender having

CERC 364-Day Revolving Credit Agreement

23

executed, delivered or performed its obligations or received a payment under, or
enforced, this Agreement or the Advances and (C) changes in the rate of tax on
the overall net income of such Lender), then the Borrower shall from time to
time, upon demand by such Lender (with a copy of such demand to the
Administrative Agent), pay to the Administrative Agent for the account of such
Lender additional amounts sufficient to compensate such Lender for such actual
increased cost; provided, however, that before making any such demand, each
Lender agrees to use reasonable efforts (consistent with its internal policy and
legal and regulatory restrictions) to designate a different Applicable Lending
Office if the making of such a designation would avoid the need for, or reduce
the amount of, such increased cost and would not, in the reasonable judgment of
such Lender, be otherwise disadvantageous to such Lender. A certificate as to
the amount of such increased cost, submitted to the Borrower and the
Administrative Agent by such Lender, shall be conclusive and binding for all
purposes, absent manifest error.

(b) If any Lender determines in good faith that compliance with any law
or regulation or any guideline or request from any central bank or other
governmental authority (whether or not having the force of law) affects or would
affect the amount of capital required or expected to be maintained by such
Lender or any corporation controlling such Lender and that the amount of such
capital is increased by or based upon the existence of such Lender's commitment
to lend hereunder and other commitments of this type, then, upon demand by such
Lender (with a copy of such demand to the Administrative Agent), the Borrower
shall pay to the Administrative Agent for the account of such Lender, from time
to time as specified by such Lender, additional amounts sufficient to compensate
such Lender or such corporation in the light of such circumstances, to the
extent that such Lender reasonably determines such increase in capital to be
allocable to the existence of such Lender's commitment to lend hereunder. A
certificate as to such amounts submitted to the Borrower and the Administrative
Agent by such Lender shall be conclusive and binding for all purposes, absent
manifest error.

(c) The agreements contained in this Section 2.12 shall survive the
termination of this Agreement and the payment of all amounts payable hereunder;
provided, however, that in no event shall the Borrower be obligated to reimburse
or compensate any Lender for amounts contemplated by this Section 2.12 for any
period prior to the date that is 90 days prior to the date upon which such
Lender requests in writing such reimbursement or compensation from the Borrower.

SECTION 2.13. Illegality. Notwithstanding any other provision
of this Agreement, if any Lender shall notify the Administrative Agent that it
has determined in good faith that the introduction of or any change in or in the
interpretation of any law or regulation makes it unlawful, or any central bank
or other governmental authority asserts that it is unlawful, for any Lender or
its Eurodollar Lending Office to perform its obligations hereunder to make
Eurodollar Rate Advances or CAF Eurodollar Rate Advances or to fund or maintain
Eurodollar Rate Advances or CAF Eurodollar Rate Advances hereunder, (a) each
Eurodollar Rate Advance or CAF Eurodollar Rate Advance, as the case may be, will
automatically, upon such demand, Convert into a Base Rate Advance or an Advance
that bears interest at the rate set forth in Section 2.08(a)(i), as the case may
be, and (b) the obligation of the Lenders to make Eurodollar Rate Advances or
CAF Eurodollar Rate Advances or to Convert Revolving Advances into, Eurodollar
Rate Advances shall be suspended until the Administrative Agent shall notify the
Borrower and the Lenders that the circumstances causing such suspension no
longer exist; provided, however, that before making any such demand, each Lender
agrees to use reasonable efforts (consistent with its internal policy and legal
and regulatory restrictions) to designate a different Eurodollar Lending Office
if the making of such a designation would allow such Lender or its Eurodollar
Lending Office to continue to perform its obligations to make Eurodollar Rate
Advances or CAF Eurodollar Rate Advances, as the case may be, or to continue to
fund or maintain Eurodollar Rate Advances or CAF Eurodollar Rate Advances, as
the case may be, and would not, in the judgment of such Lender, be otherwise
disadvantageous to such Lender.

SECTION 2.14. Payments and Computations. (a) The Borrower
shall make each payment hereunder and under the Notes (if any), irrespective of
any right of counterclaim or set-off, not later than 12:00 Noon (New York City
time) on the day when due in U.S. dollars to the Administrative Agent at the
Administrative Agent's Account in same day funds. The Administrative Agent will
promptly thereafter cause to be distributed like funds relating to the payment
of principal or interest or facility fees ratably (other than amounts payable
pursuant to Sections 2.04, 2.12, 2.15 or 8.04(c)) to the Lenders for the account
of their respective Applicable Lending Offices, and like funds relating to the
payment of any other amount payable to any Lender to such Lender for the account
of its Applicable Lending Office, in each case to be applied in accordance with
the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance
and recording of the information

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contained therein in the Register pursuant to Section 8.07(c), from and after
the effective date specified in such Assignment and Acceptance, the
Administrative Agent shall make all payments hereunder and under the Notes or
CAF Notes (if any) in respect of the interest assigned thereby to the Lender
assignee thereunder, and the parties to such Assignment and Acceptance shall
make all appropriate adjustments in such payments for periods prior to such
effective date directly between themselves.

(b) The Borrower hereby authorizes each Lender, if and to the extent
payment owed to such Lender is not made when due hereunder or under the Note or
CAF Note, as the case may be, held by such Lender (if any), to charge from time
to time against any or all of the Borrower's accounts with such Lender any
amount so due.

(c) All computations of interest based on the Base Rate shall be made
by the Administrative Agent on the basis of a year of 365 or 366 days, as the
case may be, and all computations of interest based on the Eurodollar Rate, the
CAF Rate or the Federal Funds Rate or in respect of Fixed Rate Advances and of
facility fees shall be made by the Administrative Agent on the basis of a year
of 360 days, in each case for the actual number of days (including the first day
but excluding the last day) occurring in the period for which such interest or
facility fees are payable. Each determination by the Administrative Agent of an
interest rate hereunder shall be prima facie evidence of the correctness
thereof.

(d) Whenever any payment hereunder or under the Notes or CAF Notes (if
any) shall be stated to be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of payment of interest or
facility fee, as the case may be; provided, however, that, if such extension
would cause payment of interest on or principal of Eurodollar Rate Advances or
CAF Eurodollar Rate Advances to be made in the next following calendar month,
such payment shall be made on the next preceding Business Day.

(e) Unless the Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Lenders hereunder
that the Borrower will not make such payment in full, the Administrative Agent
may assume that the Borrower has made such payment in full to the Administrative
Agent on such date and the Administrative Agent may, in reliance upon such
assumption, cause to be distributed to each Lender on such due date an amount
equal to the amount then due such Lender. If and to the extent the Borrower
shall not have so made such payment in full to the Administrative Agent, each
Lender shall repay to the Administrative Agent forthwith on demand such amount
distributed to such Lender together with interest thereon, for each day from the
date such amount is distributed to such Lender until the date such Lender repays
such amount to the Administrative Agent, at the Federal Funds Rate.

SECTION 2.15. Taxes. (a) Any and all payments by the Borrower
to or for the account of any Lender or the Administrative Agent hereunder or
under the Notes or CAF Notes (if any) or any other documents to be delivered
hereunder shall be made, in accordance with Section 2.14 or the applicable
provisions of such other documents, free and clear of and without deduction for
any and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the case
of each Lender and the Administrative Agent, net income taxes and franchise
taxes imposed on it as a result of a present or former connection between the
jurisdiction of the government or taxing authority imposing such tax and the
Administrative Agent or such Lender other than a connection arising solely from
the Administrative Agent or such Lender having executed, delivered or performed
its obligations or received a payment under, or enforced, this Agreement or any
Note or CAF Note, if any (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities in respect of payments
hereunder or under the Notes or CAF Notes (if any) being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder or under any Note or CAF Note or any
other documents to be delivered hereunder to any Lender or the Administrative
Agent, (i) the sum payable shall be increased as may be necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section 2.15) such Lender or the Administrative Agent
(as the case may be) receives an amount equal to the sum it would have received
had no such deductions been made, (ii) the Borrower shall make such deductions
and (iii) the Borrower shall pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law;
provided, however, that the Borrower shall not be required to increase any such
sums payable to any Lender with respect to any Taxes (i) that are attributable
to such Lender's failure to comply with the requirements of Section 2.15(e) or
(ii) that are United States withholding taxes imposed on sums payable to such
Lender at the time such Lender becomes a party

CERC 364-Day Revolving Credit Agreement

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to this Agreement, except to the extent that any such Lender's assignor (if any)
was entitled, at the time of assignment, to receive additional amounts from the
Borrower with respect to such Taxes pursuant to this Section 2.15. Whenever any
Taxes or Other Taxes (as defined in Section 2.15(b)) are payable by the
Borrower, as promptly as possible thereafter the Borrower shall send to the
Administrative Agent for the account of the relevant Lender or Administrative
Agent, as the case may be, either (A) official tax receipts or notarized copies
of such receipts to such Lender within thirty (30) days after payment of any
applicable tax or (B) a certificate executed by a Responsible Officer of the
Borrower confirming that such Taxes or Other Taxes have been paid, together with
evidence of such payment.

(b) In addition, the Borrower shall pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or under the Notes or CAF
Notes (if any) or any other documents to be delivered hereunder or from the
execution, delivery or registration of, performing under, or otherwise with
respect to, this Agreement or the Notes or CAF Notes (if any) or any other
documents to be delivered hereunder (hereinafter referred to as "Other Taxes").

(c) The Borrower shall indemnify each Lender and the Administrative
Agent for and hold it harmless against the full amount of Taxes or Other Taxes
(including, without limitation, taxes of any kind imposed or asserted by any
jurisdiction on amounts payable under this Section 2.15) imposed on or paid by
such Lender or the Administrative Agent (as the case may be) and any liability
(including penalties, interest and expenses) arising therefrom or with respect
thereto.

(d) Within 30 days after the date of any payment of Taxes, the Borrower
shall furnish to the Administrative Agent, at its address referred to in Section
8.02, the original or a certified copy of a receipt evidencing such payment to
the extent such a receipt is issued therefor, or other written proof of payment
thereof that is reasonably satisfactory to the Administrative Agent. In the case
of any payment hereunder or under the Notes or CAF Notes (if any) or any other
documents to be delivered hereunder by or on behalf of the Borrower through an
account or branch outside the United States or by or on behalf of the Borrower
by a payor that is not a United States person, if the Borrower determines that
no Taxes are payable in respect thereof, the Borrower shall furnish, or shall
cause such payor to furnish, to the Administrative Agent, at such address, an
opinion of counsel acceptable to the Administrative Agent stating that such
payment is exempt from Taxes. For purposes of this subsection (d) and subsection
(e), the terms "United States" and "United States person" shall have the
meanings specified in Section 7701 of the Internal Revenue Code.

(e) Each Lender registered in the Register that is not a United States
person as defined in Section 7701(a)(30) of the Internal Revenue Code agrees
that it will deliver to the Borrower and the Administrative Agent on the
Effective Date, or on the date which it becomes a party to this Agreement, two
duly completed copies of United States Internal Revenue Service Form W-8BEN,
W-8ECI, W-8EXP or W-8IMY (or other appropriate corresponding form) or any
successor applicable form, as the case may be. Each such Lender also agrees to
deliver to the Borrower and the Administrative Agent two further copies of the
said Form W-8BEN, W-8ECI, W-8EXP or W-8IMY or successor applicable forms or
other manner of certification, as the case may be, on or before the date that
any such form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent form previously delivered by it to the
Borrower, and such extensions or renewals thereof as may reasonably be requested
by the Borrower or the Administrative Agent, unless in any such case an event
(including, without limitation, any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required that renders all such forms inapplicable or that would prevent such
Lender from duly completing and delivering any such form with respect to it and
such Lender so advises the Borrower and the Administrative Agent. Each such
Lender shall certify in the case of a Form W-8BEN, W-8ECI, W-8EXP or W-8IMY that
is entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes. In the event that any
such Lender fails to deliver any forms required under this Section 2.15(e), the
Borrower's obligation to pay additional amounts shall be reduced to the amount
that it would have been obligated to pay had such forms been provided.

(f) For any period with respect to which a Lender has failed to provide
the Borrower with the appropriate form, certificate or other document described
in Section 2.15(e) (other than if such failure is due to a change in law, or in
the interpretation or application thereof, occurring subsequent to the date on
which a form, certificate or other document originally was required to be
provided, or if such form, certificate or other document otherwise is not

CERC 364-Day Revolving Credit Agreement

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required under subsection (e) above), such Lender shall not be entitled to
indemnification under Section 2.15(a) or (c) with respect to Taxes imposed by
the United States by reason of such failure; provided, however, that should a
Lender become subject to Taxes because of its failure to deliver a form,
certificate or other document required hereunder, the Borrower shall take such
steps as the Lender shall reasonably request to assist the Lender to recover
such Taxes.

(g) Any Lender claiming any additional amounts payable pursuant to this
Section 2.15 agrees to use reasonable efforts (consistent with its internal
policy and legal and regulatory restrictions) to change the jurisdiction of its
Applicable Lending Office if the making of such a change would avoid the need
for, or reduce the amount of, any such additional amounts that may thereafter
accrue and would not, in the reasonable judgment of such Lender, be otherwise
disadvantageous to such Lender.

(h) If any Taxes or Other Taxes are not correctly or legally asserted
and the Agent or any Lender determines, in its sole discretion, that it has
received a refund of those Taxes or Other Taxes as to which it has been
indemnified by the Borrower, the Administrative Agent or such Lender shall
within 20 days after such refund pay to the Borrower the amount of such refund
to the extent that the Borrower indemnified the Administrative Agent or such
Lender for such Taxes or Other Taxes pursuant to this Section 2.15, net of any
out-of-pocket costs of the Administrative Agent or such Lender and without
interest (other than any interest paid by the relevant Governmental Authority
with respect to such refund); provided, that the Borrower, upon the request of
the Administrative Agent or such Lender, agrees to repay the amount paid over to
the Borrower (plus any penalties, interest or other charges imposed by the
relevant Governmental Authority) to the Administrative Agent or such Lender in
the event the Administrative Agent or such Lender is required to repay such
refund to such Governmental Authority. This paragraph shall not be construed to
require the Administrative Agent or any Lender to make available its tax returns
(or any other information relating to its taxes which it deems confidential) to
the Borrower or any other Person.

SECTION 2.16. Sharing of Payments, Etc. If any Lender shall
obtain any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) on account of the Revolving Advances owing to it
(other than pursuant to Sections 2.12, 2.15 or 8.04(c)) in excess of its ratable
share of payments on account of the Revolving Advances obtained by all the
Lenders, such Lender shall forthwith purchase from the other Lenders such
participations in the Revolving Advances owing to them as shall be necessary to
cause such purchasing Lender to share the excess payment ratably with each of
them; provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each Lender
shall be rescinded and such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery together with an amount equal to
such Lender's ratable share (according to the proportion of (i) the amount of
such Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 2.16 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of set-off) with respect
to such participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.

SECTION 2.17. Use of Proceeds. The proceeds of the Advances
shall be available (and the Borrower agrees that it shall use such proceeds)
solely for working capital, including capital expenditures, and to repay
commercial paper.

SECTION 2.18. Evidence of Debt. (a) Each Lender shall maintain
in accordance with its usual practice an account or accounts evidencing the
indebtedness of the Borrower to such Lender resulting from each Advance owing to
such Lender from time to time, including the amounts of principal and interest
payable and paid to such Lender from time to time hereunder. The Borrower agrees
that upon notice by any Lender to the Borrower (with a copy of such notice to
the Administrative Agent) to the effect that a promissory note or other evidence
of indebtedness is required or appropriate in order for such Lender to evidence
(whether for purposes of pledge, enforcement or otherwise) the Advances owing
to, or to be made by, such Lender, the Borrower shall promptly execute and
deliver to such Lender, with a copy to the Administrative Agent, a Note or a CAF
Note, as the case may be, in substantially the form of Exhibit A or Exhibit D
hereto, respectively and as the case may be, payable to the order of such Lender
in a principal amount equal to the amount of the Revolving Advance or the CAF
Advance, as

CERC 364-Day Revolving Credit Agreement

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the case may be, of such Lender. All references to Notes or CAF Notes in the
Loan Documents shall mean Notes or CAF Notes, respectively and if any, to the
extent issued hereunder.

(b) The Register maintained by the Administrative Agent
pursuant to Section 8.07(c) shall include a control account, and a subsidiary
account for each Lender, in which accounts (taken together) shall be recorded
(i) the date and amount of each Borrowing made hereunder, the Type of Advances
comprising such Borrowing and, if appropriate, the Interest Period applicable
thereto, (ii) the terms of each Assignment and Acceptance delivered to and
accepted by it, (iii) the amount of any principal or interest due and payable or
to become due and payable from the Borrower to each Lender hereunder, and (iv)
the amount of any sum received by the Administrative Agent from the Borrower
hereunder and each Lender's share thereof.

(c) Entries made in good faith by the Administrative Agent in
the Register pursuant to subsection (b) above, and by each Lender in its account
or accounts pursuant to subsection (a) above, shall be prima facie evidence of
the amount of principal and interest due and payable or to become due and
payable from the Borrower to, in the case of the Register, each Lender and, in
the case of such account or accounts, such Lender, under this Agreement, absent
manifest error; provided, however, that the failure of the Administrative Agent
or such Lender Party to make an entry, or any finding that an entry is
incorrect, in the Register or such account or accounts shall not limit or
otherwise affect the obligations of the Borrower under this Agreement.

ARTICLE III

CONDITIONS TO EFFECTIVENESS AND LENDING

SECTION 3.01. Conditions Precedent to Effectiveness of
Sections 2.01 and 2.03. Sections 2.01 and 2.03 of this Agreement shall become
effective on and as of the first date (the "Effective Date") on which the
following conditions precedent have been satisfied:

(a) There shall have occurred no Material Adverse Change since
December 31, 2002.

(b) The Lead Arrangers shall be satisfied that any and all
amounts outstanding (including without limitation all principal,
interest, fees and other amounts owed) under the $350,000,000 Revolving
Credit Agreement, dated as of March 31, 1998 (as amended, supplemented
or otherwise modified from time to time, the "Original Revolving Credit
Facility"), among the Borrower, the lenders party thereto and Citibank,
N.A. as Administrative Agent, shall be paid by the Borrower in full,
and such Original Revolving Credit Facility shall be cancelled or
otherwise terminated prior to or immediately after the initial Advances
are made hereunder.

(c) Nothing shall have come to the attention of the Lenders
during the course of their due diligence investigation to lead them to
believe that the Information Memorandum was or has become misleading,
incorrect or incomplete in any material respect.

(d) The Borrower shall have paid all accrued fees and expenses
of the Lenders and Agents (including the accrued fees and expenses of
counsel to the Administrative Agent) and taxes, if any, due and payable
hereunder and under the Fee Letter.

(e) The Administrative Agent shall have received on or before
the Effective Date the following, each dated such day, in form and
substance satisfactory to the Administrative Agent and (except for the
Notes) in sufficient copies for each Lender:

(i) The Notes, duly executed by the Borrower and
made payable to the order of each Lender who has requested a
Note, pursuant to Section 2.18(a).

(ii) Certified copies of the (A) resolutions of
the board of directors of the Borrower approving this
Agreement and the Notes (if any), and of all documents
evidencing other necessary

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corporate action and governmental approvals, if any, with
respect to this Agreement and the Notes (if any) and (B)
certificate of incorporation and bylaws of the Borrower (such
certificate, duly executed by an authorized officer of the
Borrower, shall state that such resolutions, certificate of
incorporation and bylaws are in full force and effect as of
the Effective Date).

(iii) A certificate of the Secretary or an
Assistant Secretary of the Borrower certifying the names and
true signatures of the officers of the Borrower authorized to
sign this Agreement and the Notes (if any) and the other
documents to be delivered hereunder.

(iv) A favorable opinion of Baker Botts LLP,
counsel for the Borrower, in form and substance satisfactory
to the Agent.

(v) A favorable opinion of the in-house counsel
of the Borrower, in form and substance satisfactory to the
Agent.

(vi) A favorable opinion of Shearman & Sterling,
counsel for the Administrative Agent, in form and substance
satisfactory to the Administrative Agent.

(vii) If the obligations of the Borrower hereunder
are required to be secured, the Pledge Agreement, duly
executed by the Borrower, in substantially the form of Exhibit
H hereto.

(f) The Administrative Agent shall have received from the
Borrower such other approvals, opinions or documents as any Lender
through the Administrative Agent may reasonably request.

SECTION 3.02. Conditions Precedent to Each Revolving
Borrowing. The obligation of each Lender to make a Revolving Advance on the
occasion of each Revolving Borrowing shall be subject to the conditions
precedent that the Effective Date shall have occurred and on the date of such
Revolving Borrowing, the Administrative Agent shall have received the applicable
Notice of Borrowing signed by a Financial Officer of the Borrower, each of the
statements in which shall be true in all material respects.

SECTION 3.03. Conditions Precedent to Each CAF Borrowing. The
obligation of each Lender that is to make a CAF Advance on the occasion of a CAF
Borrowing to make such CAF Advance as part of such CAF Borrowing is subject to
the conditions precedent that (i) the Administrative Agent shall have received
the written confirmatory Competitive Bid Request pursuant to Section 2.04(a)
with respect thereto, (ii) the Administrative Agent shall have received a
Competitive Bid Confirmation from the Borrower pursuant to Section 2.04(d),
(iii) on or before the date of such CAF Borrowing, but prior to such CAF
Advance, the Administrative Agent shall have received a CAF Note in accordance
with Section 2.18(a) payable to the order of such Lender for each of the one or
more CAF Advances to be made by such Lender as part of such CAF Borrowing, in a
principal amount equal to the principal amount of the CAF Advance to be
evidenced thereby and otherwise on such terms as were agreed to for such CAF
Advance in accordance with Section 2.04, and (iv) on the date of such CAF
Borrowing the following statements shall be true (and each of the giving of the
applicable Competitive Bid Request and the acceptance by the Borrower of the
proceeds of such CAF Borrowing shall constitute a representation and warranty by
the Borrower that on the date of such CAF Borrowing such statements are true):

(a) the representations and warranties contained in Section 4.01 are
correct on and as of the date of such CAF Borrowing, before and after giving
effect to such CAF Borrowing and to the application of the proceeds therefrom,
as though made on and as of such date,

(b) no event has occurred and is continuing, or would result from such
CAF Borrowing or from the application of the proceeds therefrom, that
constitutes a Default, and

(c) no event has occurred and no circumstance exists as a result of
which the information concerning the Borrower that has been provided to the
Agent and each Lender by the Borrower in connection herewith would include an
untrue statement of a material fact or omit to state any material fact or any
fact necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading.

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SECTION 3.04. Determinations Under Section 3.01. For purposes
of determining compliance with the conditions specified in Section 3.01, each
Lender shall be deemed to have consented to, approved or accepted or to be
satisfied with each document or other matter required thereunder to be consented
to or approved by or acceptable or satisfactory to the Lenders unless an officer
of the Administrative Agent responsible for the transactions contemplated by
this Agreement shall have received notice from such Lender prior to the date
that the Borrower, by notice to the Lenders, designates as the proposed
Effective Date, specifying its objection thereto. The Administrative Agent shall
promptly notify the Lenders of the occurrence of the Effective Date.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

SECTION 4.01. Representations and Warranties of the Borrower.
The Borrower represents and warrants as follows:

(a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.

(b) The execution, delivery and performance by the Borrower of
this Agreement and the Notes or CAF Notes (if any), and the
consummation of the transactions contemplated hereby, are within the
Borrower's corporate powers, have been duly authorized by all necessary
corporate action, and do not (i) contravene the Borrower's certificate
of incorporation or by-laws or any law or any contractual restriction
binding on or affecting the Borrower, or (ii) constitute a default
under any existing indenture, loan agreement or other material
agreement to which the Borrower or any Subsidiary of the Borrower is a
party.

(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any other third party is required for the due execution, delivery
and performance by the Borrower of this Agreement or the Notes or CAF
Notes (if any), and no law or regulation is applicable that restrains,
prevents or imposes materially adverse conditions upon the transactions
contemplated hereby.

(d) This Agreement has been, and each of the Notes or CAF
Notes (if any) when delivered hereunder will have been, duly executed
and delivered by the Borrower. This Agreement is, and each of the Notes
or CAF Notes (if any) when delivered hereunder will be, the legal,
valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.

(e) The Consolidated balance sheet of the Borrower and its
Subsidiaries as of December 31, 2002, and the related Consolidated
statements of income and cash flows of the Borrower and its
Subsidiaries for the fiscal year then ended, accompanied by an opinion
of Deloitte & Touche LLP, independent public accountants, copies of
which have been furnished to each Lender, fairly present, in all
material respects, the Consolidated financial condition of the Borrower
and its Subsidiaries as at such date and the Consolidated results of
the operations of the Borrower and its Subsidiaries for the period
ended on such date, all in accordance with generally accepted
accounting principles consistently applied. Since December 31, 2002,
there has been no Material Adverse Change.

(f) There is no pending or threatened action, suit,
investigation, litigation or proceeding, including, without limitation,
any Environmental Action, affecting the Borrower or any of its
Subsidiaries before any court, governmental agency or arbitrator that
(i) could be reasonably likely to have a Material Adverse Effect or
(ii) purports to affect the legality, validity or enforceability of
this Agreement or any other Loan Document or the consummation of the
transactions contemplated hereby.

(g) The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying Margin Stock, and no
proceeds of any Advance will be used to purchase or carry any Margin
Stock or to extend credit to others for the purpose of purchasing or
carrying any Margin Stock.

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(h) Neither the Borrower nor any Subsidiary of the Borrower is
an "investment company" as defined in, or otherwise subject to
regulation under, the Investment Company Act of 1940, as amended. None
of the execution and delivery of the Loan Documents by the Borrower or
the performance of its obligations thereunder violate any regulation
under the Public Utility Holding Company Act of 1935, as amended.

(i) The Borrower is and each of its Subsidiaries are in
substantial compliance with all applicable laws, ordinances, rules,
regulations, and requirements of governmental authorities (including,
without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except for any non-compliance that could not
reasonably be expected to have a Material Adverse Effect.

(j) All written information heretofore furnished by the
Borrower to the Administrative Agent or any Lender for purposes of or
in connection with this Agreement or any transaction contemplated
hereby or thereby is, and all such information hereafter furnished by
the Borrower to the Administrative Agent or any Lender will be, true
and accurate in all material respects on the date as of which such
information is stated in the light of the circumstances under which
such information was provided (as modified or supplemented by other
information so furnished, when taken together as a whole as of the date
so stated); provided, that, with respect to projected financial
information, the Borrower represents only that such information was
prepared in good faith based on assumptions believed to be reasonable
at the time, it being recognized by the Lenders that such projections
as to future events are not to be viewed as facts and that actual
results during the period or periods covered by any such projections
may differ from the projected results. The Borrower has disclosed to
the Administrative Agent any and all facts specific to the Borrower and
its Subsidiaries and known as of the date hereof to a Responsible
Officer of the Borrower that could reasonably be expected to result in
a Material Adverse Effect or which could reasonably be expected to
materially and adversely affect or may affect (to the extent the
Borrower can now reasonably foresee), the business, operations or
financial condition of the Borrower and its Subsidiaries, taken as a
whole.

(k) The Borrower is, and together with its Subsidiaries, taken
as a whole, Solvent as of the date hereof.

ARTICLE V

COVENANTS OF THE BORROWER

SECTION 5.01. Affirmative Covenants. So long as any Advance
shall remain unpaid or any Lender shall have any Commitment hereunder, the
Borrower will:

(a) Compliance with Laws, Etc. Comply, and cause each of its
Subsidiaries to comply, in all material respects, with all applicable
laws, rules, regulations and orders, such compliance to include,
without limitation, compliance with ERISA and Environmental Laws,
except to the extent the failure to so comply could not reasonably be
expected to have a Material Adverse Effect.

(b) Payment of Taxes, Etc. Pay and discharge, and cause each
of its Significant Subsidiaries to pay and discharge, before the same
shall become delinquent, (i) all taxes, assessments and governmental
charges or levies imposed upon it or upon its property and (ii) all
lawful claims that, if unpaid, might by law become a Lien upon its
property or unless the failure to pay could not reasonably be expected
to result in a Material Adverse Effect; provided, however, that neither
the Borrower nor any of its Significant Subsidiaries shall be required
to pay or discharge any such tax, assessment, charge or claim that is
being contested in good faith and by proper proceedings and as to which
appropriate reserves are being maintained or unless the failure to pay
could not reasonably be expected to result in a Material Adverse
Effect.

(c) Maintenance of Insurance. Maintain, and cause each of its
Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations in such amounts and covering such

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risks as is usually carried by companies engaged in similar businesses
and owning similar properties; provided, however, that the Borrower and
its Subsidiaries may self-insure to the same extent as other companies
engaged in similar businesses and owning similar properties and to the
extent consistent with prudent business practice.

(d) Preservation of Corporate Existence, Etc. Preserve and
maintain, and cause each of its Subsidiaries to preserve and maintain,
its corporate existence, rights (charter and statutory) and franchises,
except (other than in the case of the Borrower) to the extent such
failure could not reasonably be expected to have a Material Adverse
Effect; provided, however, that the Borrower and its Subsidiaries may
consummate any merger or consolidation permitted under Section 5.02(b)
and provided further that neither the Borrower nor any of its
Subsidiaries shall be required to preserve any right or franchise if
the board of directors of the Borrower or such Subsidiary shall
determine that the preservation thereof is no longer desirable in the
conduct of the business of the Borrower or such Subsidiary, as the case
may be, and that the loss thereof is not disadvantageous in any
material respect to the Borrower, such Subsidiary or the Lenders.

(e) Visitation Rights. The Borrower will, and will cause each
of its Subsidiaries to, at any reasonable time and from time to time,
permit up to six representatives of the Lenders designated by the
Required Lenders, or representatives of the Agents, on not less than
five (5) Business Days' notice, to examine and make copies of and
abstracts from the records and books of account of, and visit the
properties of, the Borrower and each Significant Subsidiary and to
discuss the general business affairs of the Borrower and each of its
Subsidiaries with their respective officers and independent certified
public accountants; subject, however, in all cases to the imposition of
such conditions as the Borrower and each of its Significant
Subsidiaries shall deem necessary based on reasonable considerations of
safety and security; provided, however, that neither the Borrower nor
any of its Subsidiaries shall be required to disclose to any Agent, any
Lender or any agents or representatives thereof any information which
is the subject of attorney-client privilege or attorney work-product
privilege properly asserted by the applicable Person to prevent the
loss of such privilege in connection with such information or which is
prevented from disclosure pursuant to a confidentiality agreement with
third parties. Notwithstanding the foregoing, none of the conditions
precedent to the exercise of the right of access described in the
preceding sentence that relate to notice requirements or limitations on
the Persons permitted to exercise such right shall apply at any time
when a Default or an Event of Default shall have occurred.

(f) Keeping of Books. Keep, and cause each of its Subsidiaries
to keep, proper books of record and account, in which full and correct
entries shall be made of all financial transactions and the assets and
business of the Borrower and each such Subsidiary in accordance with
GAAP.

(g) Maintenance of Properties, Etc. Maintain and preserve, and
cause each of its Subsidiaries to maintain and preserve, all of its
properties that are used or useful in the conduct of its business in
good working order and condition, ordinary wear and tear excepted.

(h) Maintenance of Existing Business. Maintain and preserve
its fundamental business of being a local gas distribution company and
an owner and operator of natural gas pipeline systems.

(i) Use of Proceeds. Use the proceeds of each Advance only for
working capital purposes, including capital expenditures, of the
Borrower and its Subsidiaries and the repayment of commercial paper,
provided, that in no case shall such proceeds be used to repay amounts
outstanding under the Bridge Credit Agreement.

(j) Reporting Requirements. Furnish to the Lenders:

(i) as soon as practicable and in any event within 60
days after the end of each of the first three quarters of each
fiscal year of the Borrower, unaudited Consolidated balance
sheets of the Borrower and its Subsidiaries, prepared in
conformity with GAAP consistently applied, as of the end of
such quarter and Consolidated statements of income and cash
flows of the Borrower and its Subsidiaries, prepared in
conformity with GAAP consistently applied, for the period
commencing at the end of the previous fiscal year and ending
with the end of such quarter, duly

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certified (subject to year-end audit adjustments and the
inclusion of abbreviated footnotes) by Responsible Officer of
the Borrower as having been prepared in accordance with
generally accepted accounting principles and certificates of a
Responsible Officer of the Borrower as to compliance with the
terms of this Agreement and setting forth in reasonable detail
the calculations necessary to demonstrate compliance with
Section 5.03 (which requirement may be satisfied by delivering
the Borrower's quarterly report on Form 10-Q with respect to
such fiscal quarter as filed with the Securities and Exchange
Commission);

(ii) as soon as practicable and in any event within
120 days after the end of each fiscal year of the Borrower
commencing 2003, a copy of the annual audit report for such
year for the Borrower and its Subsidiaries, containing
Consolidated balance sheets of the Borrower and its
Subsidiaries as of the end of such fiscal year and
Consolidated statements of income and cash flows of the
Borrower and its Subsidiaries for such fiscal year accompanied
by an opinion of an independent public accountants, in each
case prepared in conformity with GAAP consistently applied
(which requirement may be satisfied by delivering the
Borrower's annual report on Form 10-K with respect to such
fiscal year as filed with the Securities and Exchange
Commission) together with a certificate of a Responsible
Officer of the Borrower identifying Significant Subsidiaries
determined with respect to such financial statements;

(iii) as soon as practicable and in any event within
seven Business Days after a Responsible Officer of the
Borrower becomes aware of the occurrence of each Default
continuing on the date of such statement, a statement of a
Responsible Officer of the Borrower setting forth details of
such Default and the action that the Borrower has taken and
proposes to take with respect thereto;

(iv) within ten (10) days of the filing thereof,
copies of all periodic reports (other than (x) reports on Form
11-K or any successor form, (y) current reports on Form 8-K
that contain no information other than exhibits filed
therewith and (z) reports on Form 10-Q or 10-K or any
successor forms) under the Exchange Act (in each case other
than exhibits thereto and documents incorporated by reference
therein)) filed by the Borrower with the Securities and
Exchange Commission;

(v) promptly after the commencement thereof, notice
of all actions and proceedings before any court, governmental
agency or arbitrator affecting the Borrower or any of its
Subsidiaries of the type described in Section 4.01(f); and

(vi) such other information respecting the Borrower
or any of its Subsidiaries as any Lender through the
Administrative Agent may from time to time reasonably request.

Information required to be delivered pursuant to the foregoing Sections
5.01(j)(i), (ii) and (iv) shall be deemed to have been delivered on the
date on which the Borrower provides notice (including notice by e-mail)
to the Administrative Agent (which notice the Administrative Agent will
convey promptly to the Lenders) that such information has been posted
on the Securities and Exchange Commission website on the internet at
sec.gov/edgar/searches.htm or at another website identified in such
notice and accessible by the Lenders without charge; provided that such
notice may be included in a certificate delivered pursuant to Section
5.01(j)(i).

SECTION 5.02. Negative Covenants. So long as any Advance shall
remain unpaid or any Lender shall have any Commitment hereunder, the Borrower
will not:

(a) Restrictions on Liens. Pledge, mortgage or hypothecate, or
permit to exist, and will not permit any Subsidiary (other than a
Project Finance Subsidiary) to pledge, mortgage or hypothecate, or
permit to exist, except in favor of Borrower or any Subsidiary (other
than a Project Finance Subsidiary), any Lien upon, any Principal
Property or Equity Interest in any Significant Subsidiary (other than a
Project Finance Subsidiary) owning any Principal Property, at any time
owned by Borrower or a Subsidiary (other

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than a Project Finance Subsidiary), to secure any Indebtedness;
provided, however, that this restriction shall not apply to or prevent
the creation or existence of any Permitted Lien.

(b) Consolidation, Mergers or Disposal of Assets. (i)
consolidate with, or merge into or amalgamate with or into, any other
Person; (ii) liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution); or (iii) convey, sell, transfer, lease or
otherwise dispose of all or substantially all of its assets to any
Person, or permit any Significant Subsidiary (other than a Project
Finance Subsidiary) to do so; provided, however, that nothing contained
in this Section 5.02(b) shall prohibit (A) a merger in which Borrower
is the surviving entity thereof; (B) mergers involving Significant
Subsidiaries in which Borrower or, if the Borrower is not a party to
such merger, a Wholly-Owned Significant Subsidiary (other than a
Project Finance Subsidiary, except for the case where all parties to
such merger are Project Finance Subsidiaries) is the surviving entity;
(C) the liquidation, winding up or dissolution of a Significant
Subsidiary if all of the assets of such Significant Subsidiary are
conveyed, transferred or distributed to Borrower or a Wholly-Owned
Significant Subsidiary (other than a Project Finance Subsidiary, unless
such Significant Subsidiary is also a Project Finance Subsidiary); (D)
the conveyance, sale, transfer, lease or other disposal of all or
substantially all (or any lesser portion) of the assets of any
Significant Subsidiary to Borrower or a Wholly-Owned Significant
Subsidiary (other than a Project Finance Subsidiary, unless such
Significant Subsidiary is also a Project Finance Subsidiary); or (E)
additional conveyances, sales, transfers, leases or other disposals of
assets of the Borrower and its Subsidiaries, provided, that the
aggregate net book value of all assets of the Borrower and its
Subsidiaries conveyed, sold, transferred, leased or otherwise disposed
of pursuant to this clause (E) shall not exceed $200,000,000 or shall
constitute assets that are no longer necessary for the operation of the
business of the Borrower and its Subsidiaries; provided that, in each
case covered by this Section 5.02(b), immediately before and after
giving effect to any such merger, dissolution or liquidation, or
conveyance, sale, transfer, lease or other disposition, no Default
shall have occurred and be continuing.

(c) Accounting Changes. Make or permit, or permit any of its
Subsidiaries to make or permit, any change in accounting policies or
reporting practices, except as required or permitted by GAAP.

(d) Subsidiary Indebtedness. Permit any Significant Subsidiary
to be a party to, guarantee, assume, create, incur, issue or otherwise
be liable in any manner in connection with or suffer to exist, any
Indebtedness or preferred stock other than (i) Indebtedness for
Borrowed Money and preferred stock which does not exceed at any time
outstanding an aggregate amount for all Significant Subsidiaries of
$100,000,000 (for purposes of this clause (i), the amount of
Indebtedness for Borrowed Money will be the outstanding principal
amount thereof, and the amount of any preferred stock will be the
greater of the par value thereof or the consideration received in the
issuance thereof), (ii) assumed Indebtedness for Borrowed Money and
preferred stock of any Person that becomes a Subsidiary after the date
hereof, if such Indebtedness for Borrowed Money or preferred stock is
in existence at the time such Person becomes a Subsidiary and was not
created in contemplation thereof and no other Subsidiary is liable
therefor, (iii) Indebtedness for Borrowed Money owed to and held by,
and preferred stock held by, the Borrower or any Wholly-Owned
Subsidiary of the Borrower, (iv) Non-Recourse Debt and (v) Indebtedness
for Borrowed Money existing on the date hereof, any refinancing thereof
in an amount not greater than the outstanding amount thereof at the
time of such refinancing and any preferred stock existing on the date
hereof.

(e) Restrictions on Dividends, Intercompany Loans, or
Investments. Permit, or permit any Significant Subsidiary (other than a
Project Finance Subsidiary) to, create or otherwise cause or permit to
exist or become effective any explicit and direct restriction under any
agreement evidencing or providing for the issuance of Indebtedness for
Borrowed Money (other than this Agreement) on the ability of any
Significant Subsidiary (other than a Project Finance Subsidiary) to (i)
pay dividends or make any other distributions on its capital stock or
pay any Indebtedness owed to the Borrower or any Subsidiary of the
Borrower, (ii) make any loans or advances to or investments in the
Borrower or any Subsidiary of the Borrower, or (iii) transfer any of
its property or assets to the Borrower or any Subsidiary of the
Borrower; provided, that the foregoing shall not prohibit financial
incurrence, maintenance and similar covenants that indirectly have the
practical effect of prohibiting or restricting the ability of a
Significant Subsidiary to make such payments or provisions that require
that a certain amount of capital be maintained, or prohibit the return
of capital to shareholders above certain dollar limits; provided,
further, that the foregoing shall

CERC 364-Day Revolving Credit Agreement

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not apply to (i) restrictions and conditions imposed by law or by this
Agreement, (ii) restrictions and conditions existing on the date
hereof, any amendment or modification thereof (other than an amendment
or modification expanding the scope of any such restriction or
condition and any restrictions or conditions) that (x) replace
restrictions or conditions existing on the date hereof and (y) are
substantially similar to such existing restriction or condition, (iii)
restrictions (including any extension of such restrictions that does
not expand the scope of any such restrictions) existing at the time at
which any such Subsidiary first becomes a Significant Subsidiary, so
long as such restriction was in existence prior to such time in
accordance with the other provisions of this Agreement and was not
agreed to or incurred in contemplation of such change of status and
(iv) any restrictions with respect to a Significant Subsidiary imposed
pursuant to an agreement that has been entered into in connection with
a disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary (if such disposal is otherwise permitted
under this Agreement).

(f) Affiliate Transaction. And will not permit any Subsidiary
of Borrower to, make, directly or indirectly, (i) any transfer, sale,
lease or other disposition of any Property to any Affiliate of Borrower
or any Subsidiary of Borrower or any purchase or acquisition of any
Property from any such Affiliate; or (ii) any other arrangement or
transaction directly or indirectly with or for the benefit of any such
Affiliate (including without limitation, guaranties and assumptions of
obligations of any such Affiliate); provided, that (A) Borrower and any
such Subsidiary may enter into any arrangement or other transaction
with any such Affiliate if the monetary or business consideration
arising therefrom would be substantially at least as advantageous to
Borrower or such Subsidiary as the monetary or business consideration
which would be obtained in a comparable arm's length transaction with a
Person not an Affiliate of Borrower or any Subsidiary of Borrower; (B)
Borrower and any Subsidiary of Borrower may become liable in connection
with guaranties of the obligations of any such Affiliate in the
ordinary course of business, other than guaranties of Indebtedness for
Borrowed Money; (C) Borrower and its Subsidiaries may make purchases of
receivables of any kind from the Borrower and the Subsidiaries of
Borrower on terms that any of them deem acceptable; (D) intercompany
borrowings between Borrower and any Subsidiary of Borrower and between
any Subsidiaries of the Borrower and other such Subsidiaries of the
Borrower may be on terms that they deem acceptable or under the
Parent's money pool; (E) Borrower may enter into any arrangement or
other transaction with any Wholly-Owned Subsidiary of Borrower, and any
Wholly-Owned Subsidiary of Borrower may enter into any arrangement or
other transaction with Borrower or any other Wholly-Owned Subsidiary of
Borrower, in each case under this clause (E) only if such arrangements
and other transactions do not involve any Person other than Borrower
and Wholly-Owned Subsidiaries of Borrower; and (F) Borrower may enter
into arrangements or other transactions permitted by Section
5.02(b)(E).

(g) Payments on Preferred Stock. And will not permit any
Subsidiary of Borrower to, make or agree to make any payment or other
distribution on or in connection with, or purchase, redeem or otherwise
acquire or agree to do so, or convert or exchange or agree to convert
or exchange, in whole or in part, any capital stock or other equity
interest of Borrower or any Subsidiary of Borrower, in whole or in part
(including, without limitation, dividends), in each case if prior to
and immediately after giving effect thereto, any Default or Event of
Default exists or would occur.

(h) Investments in the Parent. Make or hold, or permit any of
its Subsidiaries to make or hold, any Investment in the Parent, other
than money pool loans.

(i) Use of Proceeds: Regulation U. Use the proceeds of any
Borrowing (i) to purchase or carry, within the meaning of Regulation U,
any Margin Stock, (ii) to participate in any tender offer for the
securities of any Person, unless such tender offer has been approved by
the board of directors, general partners or other governing body of
such Person or (iii) for any purpose that would violate or result in a
violation of any law or regulation. Borrower will not, and will not
permit any of its Subsidiaries to engage principally, or as one of its
important activities, in the business of extending credit for the
purpose of purchasing or carrying, within the meaning of Regulation U,
any Margin Stock.

SECTION 5.03. Financial Covenants. So long as any Advance
shall remain unpaid or any Lender shall have any Commitment hereunder, the
Borrower will:

CERC 364-Day Revolving Credit Agreement

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(a) Total Debt to Capitalization Ratio. Maintain a ratio of
Total Debt for Borrowed Money to Consolidated Capitalization of no
greater than 0.60:1.00, calculated on a quarterly basis.

(b) Fixed Charge Coverage Ratio. Maintain a ratio of EBITDA to
Cash Interest for the immediately preceding four calendar quarters of
no less than 2.25:1.00, calculated on a quarterly basis.

ARTICLE VI

EVENTS OF DEFAULT

SECTION 6.01. Events of Default. If any of the following
events ("Events of Default") shall occur and be continuing:

(a) The Borrower shall fail to pay any principal of any
Advance when the same becomes due and payable; or the Borrower shall
fail to pay any interest on any Advance or make any other payment of
fees or other amounts payable under this Agreement or any Note or CAF
Note, as the case may be, within five Business Days after the same
becomes due and payable; or

(b) Any representation or warranty made by the Borrower herein
or by the Borrower (or any of its officers) in this Agreement or any
other Loan Document shall prove to have been incorrect in any material
respect when made; or

(c) (i) The Borrower shall fail to perform or observe any
term, covenant or agreement contained in Sections 5.01(d), (e), (h) or
(j)(iii), 5.02 or 5.03, or (ii) the Borrower shall fail to perform or
observe any other term, covenant or agreement contained in this
Agreement on its part to be performed or observed if such failure shall
not have been remedied within 30 days; or

(d) The Borrower or any of its Significant Subsidiaries (other
than a Project Finance Subsidiary) shall fail to pay any principal of
or premium or interest on any Indebtedness for Borrowed Money that is
outstanding in a principal amount of at least $30,000,000 in the
aggregate (but excluding Indebtedness outstanding hereunder) of the
Borrower or such Subsidiary (as the case may be), when the same becomes
due and payable (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreement
or instrument relating to such Indebtedness; or any other event shall
occur or condition shall exist under any agreement or instrument
relating to any such Indebtedness and shall continue after the
applicable grace period, if any, specified in such agreement or
instrument, if the effect of such event or condition is to accelerate,
or to permit the acceleration of, the maturity of such Indebtedness; or
any such Indebtedness shall be declared to be due and payable, or
required to be prepaid or redeemed (other than by a regularly scheduled
required prepayment or redemption), purchased or defeased, or an offer
to prepay, redeem, purchase or defease such Indebtedness shall be
required to be made, in each case prior to the stated maturity thereof;
or

(e) The Borrower or any of its Significant Subsidiaries (other
than a Project Finance Subsidiary) shall generally not pay its debts as
such debts become due, or shall admit in writing its inability to pay
its debts generally, or shall make a general assignment for the benefit
of creditors; or any proceeding shall be instituted by or against the
Borrower or any of its Significant Subsidiaries (other than any Project
Finance Subsidiary) seeking to adjudicate it a bankrupt or insolvent,
or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief
of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property and, in the case of
any such proceeding instituted against it (but not instituted by it),
either such proceeding shall remain undismissed or unstayed for a
period of 30 days, or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief
against, or the appointment of a receiver, trustee, custodian or other
similar official for, it or for any substantial part of its

CERC 364-Day Revolving Credit Agreement

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property) shall occur; or the Borrower or any of its Significant
Subsidiaries (other than any Project Finance Subsidiary) shall take any
action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts described in this subsection (e); or

(f) Judgments or orders for the payment of money in excess of
$30,000,000 in the aggregate shall be rendered against the Borrower or
any of its Significant Subsidiaries (other than a Project Finance
Subsidiary) and either (i) enforcement proceedings shall have been
commenced by any creditor upon such judgment or order or (ii) there
shall be any period of 30 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; or

(g) Any non-monetary judgment or order shall be rendered
against the Borrower or any of its Significant Subsidiaries (other than
a Project Finance Subsidiary) that could be reasonably expected to have
a Material Adverse Effect, and there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment or
order, by reason of a pending appeal or otherwise, shall not be in
effect; or

(h) For any reason, (i) the Parent fails to own, directly or
indirectly, at least 50% of the economic interest in Borrower or (ii)
the Parent fails to own, directly or indirectly, at least 50% of the
outstanding shares of stock, Voting Stock or other ownership interests
having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a
contingency) to elect directors or other managers of Borrower or (iii)
the Borrower fails to own, directly or indirectly, at least 50% of the
economic interest in CenterPoint Energy - Mississippi River
Transmission Corporation, a Delaware corporation ("MRT") or (iv) the
Borrower fails to own, directly or indirectly, at least 50% of the
economic interest in CenterPoint Energy Gas Transmission Company, a
Delaware corporation ("CEGT") or (v) the Borrower fails to own at least
50% of the outstanding shares of stock, Voting Stock or other ownership
interests having ordinary voting power (other than stock or such other
ownership interests having such power only by reason of the happening
of a contingency) to elect directors or other managers of MRT or (vi)
the Borrower fails to own at least 50% of the outstanding shares of
stock, Voting Stock or other ownership interests having ordinary voting
power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect
directors or other managers of CEGT; or

(i) The Borrower or any of its ERISA Affiliates shall incur,
or could be reasonably expected to incur, liability in excess of
$50,000,000 in the aggregate as a result of one or more of the
following: (i) the occurrence of any ERISA Event; (ii) the partial or
complete withdrawal of the Borrower or any of its ERISA Affiliates from
a Multiemployer Plan; or (iii) the reorganization or termination of a
Multiemployer Plan;

then, and in any such event, the Administrative Agent (i) shall at the request,
or may with the consent, of the Required Lenders, by notice to the Borrower,
declare the obligation of each Lender to make Advances to be terminated,
whereupon the same shall forthwith terminate, and (ii) shall at the request, or
may with the consent, of the Required Lenders, by notice to the Borrower,
declare the Notes or CAF Notes (if any), the unpaid principal amount of all
outstanding Advances, all interest thereon and all other amounts payable under
this Agreement to be forthwith due and payable, whereupon the Notes or CAF Notes
(if any), all such interest and all such amounts shall become and be forthwith
due and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower; provided,
however, that in the event of an actual or deemed entry of an order for relief
with respect to the Borrower under the Federal Bankruptcy Code, (A) the
obligation of each Lender to make Advances shall automatically be terminated and
(B) the Notes or CAF Notes (if any), the unpaid principal amount of all
outstanding Advances, all such interest and all such amounts shall automatically
become and be due and payable, without presentment, demand, protest or any
notice of any kind, all of which are hereby expressly waived by the Borrower.

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ARTICLE VII

THE AGENTS

SECTION 7.01. Authorization and Action. Each Lender hereby
appoints and authorizes each Agent to take such action as Agent on its behalf
and to exercise such powers and discretion under this Agreement and the other
Loan Documents as are delegated to such Agent by the terms hereof, together with
such powers and discretion as are reasonably incidental thereto. As to any
matters not expressly provided for by this Agreement (including, without
limitation, enforcement or collection of the Notes or CAF Notes, if any), the
Agents shall not be required to exercise any discretion or take any action, but
shall be required to act or to refrain from acting (and shall be fully protected
in so acting or refraining from acting) upon the instructions of the Required
Lenders, subject, with respect to the Collateral Agent, to Section 8.08, and
such instructions shall be binding upon all Lenders and all holders of Notes or
CAF Notes (if any); provided, however, that neither of the Agents shall be
required to take any action that exposes such Agent to personal liability or
that is contrary to this Agreement or applicable law. Each Agent agrees to give
to each Lender prompt notice of each notice given to it by the Borrower pursuant
to the terms of this Agreement.

SECTION 7.02. Agents' Reliance, Etc. Neither the Agents nor
any of their respective directors, officers, agents or employees shall be liable
for any action taken or omitted to be taken by it or them under or in connection
with this Agreement, except for its or their own gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, each Agent:
(i) may treat the payee of any Note or CAF Note, as the case may be, as the
holder thereof until the such Agent receives and accepts an Assignment and
Acceptance entered into by the Lender that is the payee of such Note or CAF
Note, as the case may be, as assignor, and an Eligible Assignee, as assignee, as
provided in Section 8.07; (ii) may consult with legal counsel (including counsel
for the Borrower), independent public accountants and other experts selected by
it and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants or
experts; (iii) makes no warranty or representation to any Lender and shall not
be responsible to any Lender for any statements, warranties or representations
(whether written or oral) made in or in connection with this Agreement; (iv)
shall not have any duty to ascertain or to inquire as to the performance,
observance or satisfaction of any of the terms, covenants or conditions of this
Agreement on the part of the Borrower or the existence at any time of any
Default or to inspect the property (including the books and records) of the
Borrower; (v) shall not be responsible to any Lender for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of, or, if
applicable, the perfection or priority of any lien or security interest created
or purported to be created under or in connection with, this Agreement or any
other instrument or document furnished pursuant hereto; and (vi) shall incur no
liability under or in respect of this Agreement by acting upon any notice,
consent, certificate or other instrument or writing (which may be by telecopier,
telegram or telex) believed by it to be genuine and signed or sent by the proper
party or parties.

SECTION 7.03. CUSA, JPMS and Affiliates. With respect to its
Commitment, the Advances made by it and the Note or CAF Note, if any, issued to
it, CUSA and JPMS shall have the same rights and powers under this Agreement as
any other Lender and may exercise the same as though it were not an Agent; and
the term "Lender" or "Lenders" shall, unless otherwise expressly indicated,
include CUSA and JPMS in their respective individual capacities. CUSA and JPMS
and their respective Affiliates may accept deposits from, lend money to, act as
trustee under indentures of, accept investment banking engagements from and
generally engage in any kind of business with, the Borrower, any of its
Subsidiaries and any Person who may do business with or own securities of the
Borrower or any such Subsidiary, all as if CUSA and JPMS were not Agents and
without any duty to account therefor to the Lenders. The Agents shall have no
duty to disclose any information obtained or received by it or any of its
Affiliates relating to the Borrower or any of its Subsidiaries to the extent
such information was obtained or received in any capacity other than as Agent.

SECTION 7.04. Lender Credit Decision. Each Lender acknowledges
that it has, independently and without reliance upon any Agent or any other
Lender and based on the financial statements referred to in Section 4.01 and
such other documents and information as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon any Agent or
any other Lender and based on such documents and information as it shall deem

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appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.

SECTION 7.05. Indemnification. The Lenders agree to indemnify
each Agent (to the extent not reimbursed by the Borrower), ratably according to
the respective principal amounts of the Notes (if any) then held by each of them
(or if no Notes are at the time outstanding or if any Notes are held by Persons
that are not Lenders, ratably according to the respective amounts of their
Commitments), from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever that may be imposed on, incurred by, or
asserted against such Agent in any way relating to or arising out of this
Agreement or any action taken or omitted by such Agent under this Agreement
(collectively, the "Indemnified Costs"), provided that no Lender shall be liable
for any portion of the Indemnified Costs resulting from such Agent's gross
negligence or willful misconduct. Without limitation of the foregoing, each
Lender agrees to reimburse each Agent promptly upon demand for its ratable share
of any out-of-pocket expenses (including counsel fees) incurred by each Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, to the extent that such Agent is not
reimbursed for such expenses by the Borrower. In the case of any investigation,
litigation or proceeding giving rise to any Indemnified Costs, this Section 7.05
applies whether any such investigation, litigation or proceeding is brought by
any Agent, any Lender or a third party.

SECTION 7.06. Successor Agents. Any Agent may resign at any
time by giving written notice thereof to the Lender Parties and the Borrower and
may be removed at any time with or without cause by the Required Lenders. Upon
any such resignation or removal, the Required Lenders shall have the right to
appoint a successor Agent. If no successor Agent shall have been so appointed by
the Required Lenders, and shall have accepted such appointment, within 30 days
after the retiring Agent's giving of notice of resignation or the Required
Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf
of the Lenders, appoint a successor Agent, which shall be a commercial bank
organized under the laws of the United States of America or of any State thereof
and having a combined capital and surplus of at least $500,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, discretion, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and obligations under this
Agreement. After any retiring Agent's resignation or removal hereunder as Agent,
the provisions of this Article VII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.

ARTICLE VIII

MISCELLANEOUS

SECTION 8.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Notes (if any), nor consent to any departure
by the Borrower therefrom, shall in any event be effective unless the same shall
be in writing and signed by the Required Lenders, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no amendment, waiver or consent
shall, unless in writing and signed by the relevant Lenders, do any of the
following: (a) waive any of the conditions specified in Section 3.01, without
the consent of any affected Lender, (b) increase the Commitments of any affected
Lender, (c) reduce the principal of, or interest on, the Notes (if any) or any
fees or other amounts payable hereunder to such Lender, (d) postpone any date
fixed for any payment of principal of, or interest on, the Notes (if any) or any
fees or other amounts payable hereunder to such Lender, (e) change the
percentage of the Commitments or the aggregate unpaid principal amount of the
Notes (if any), or the number of Lenders, that shall be required for the Lenders
or any of them to take any action hereunder without the consent of all Lenders,
or (f) amend this Section 8.01 without the consent of all Lenders; and provided
further that without the consent of all Lenders, to the extent that the Lenders
have any rights of consent with respect thereto, the Collateral Agent shall not
release the security interest of the Lenders in any of the Collateral other than
in accordance with the terms of this Agreement or the other applicable Loan
Documents; and provided further that no amendment, waiver or consent shall,
unless in writing and signed by an Agent in addition to the Lenders required
above to take such action, affect the rights or duties of the such Agent under
this Agreement or any Note.

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SECTION 8.02. Notices, Etc. (a) (a) All notices and other
communications provided for hereunder shall be either (x) in writing (including
telecopier or telegraphic communication) and mailed, telecopied, telegraphed or
delivered or (y) as and to the extent set forth in Section 8.02(b) and in the
proviso to this Section 8.02(a), in an electronic medium and delivered as set
forth in Section 8.02(b), if to the Borrower, at its address at P.O. Box 2805,
Houston, TX 77252, Attention: Assistant Treasurer (telecopy: 713 207 3301); if
to any Initial Lender, at its Domestic Lending Office specified opposite its
name on Schedule I hereto; if to any other Lender, at its Domestic Lending
Office specified in the Assignment and Acceptance pursuant to which it became a
Lender; if to the Lead Arrangers, in the case of SSBI, at its address at 390
Greenwich Street, New York, New York, 10013, Attention: Peter Kettle (telecopy:
212 723 8548), with a copy to 388 Greenwich Street, New York, New York, 10013,
Attention: Stuart Glen (telecopy: 212 816 8098), or in the case of JPMS, at its
address at 600 Travis, 20th Floor, Houston, Texas, 77002, Attention: Rob Traband
(telecopy: 713 216 8870) or 270 Park Avenue, 4th Floor, New York, New York,
10017, Attention: Thomas Hou (telecopy: 212 270 3897); if to the Collateral
Agent, at its address at Two Penns Way, Suite 200, New Castle, Delaware, 19720,
Attention: Janet Wallace (212 994 0961), with a copy to 388 Greenwich Street,
New York, New York, 10013, Attention: Stuart Glen (telecopy: 212 816 8098); and
if to the Administrative Agent, at its address at Two Penns Way, Suite 200, New
Castle, Delaware, 19720, Attention: Bank Loan Syndications Department/Janet
Wallace (telecopy: 212 994 0961), with a copy to 388 Greenwich Street, New York,
New York, 10013, Attention: Stuart Glen (telecopy: 212 816 8098); or, as to the
Borrower or the Administrative Agent, at such other address as shall be
designated by such party in a written notice to the other parties and, as to
each other party, at such other address as shall be designated by such party in
a written notice to the Borrower and the Administrative Agent; provided, that
materials required to be delivered pursuant to Section 5.01(j)(i), (ii) and (iv)
shall be delivered to the Administrative Agent as specified in Section 8.02(b)
or as otherwise specified to the Borrower by the Administrative Agent. All such
notices and communications shall, when mailed, telecopied, telegraphed or
emailed, be effective when deposited in the mails, telecopied, delivered to the
telegraph company or confirmed by email, respectively, except that notices and
communications to the Administrative Agent pursuant to Article II, III or VII
shall not be effective until received by the Administrative Agent. Delivery by
telecopier of an executed counterpart of any amendment or waiver of any
provision of this Agreement or the Notes or CAF Notes (if any) or of any Exhibit
hereto to be executed and delivered hereunder shall be effective as delivery of
a manually executed counterpart thereof.

(b) So long as CUSA is the Administrative Agent, materials required to
be delivered pursuant to Section 5.01(j)(i), (ii) and (iv) shall be delivered to
the Administrative Agent in an electronic medium in a format acceptable to the
Administrative Agent and the Lenders by email at oploanswebadmin@citigroup.com,
and if any Lender so requests, delivered to such Lender at its address set forth
on Schedule I hereto in hardcopy form. The Borrower agrees that the
Administrative Agent may make such materials, as well as any other written
information, documents, instruments and other material relating to the Borrower,
any of its Subsidiaries or any other materials or matters relating to this
Agreement, the Notes or CAF Notes (if any) or any of the transactions
contemplated hereby (collectively, the "Communications") available to the
Lenders by posting such notices on "e-Disclosure" (the "Platform"), the
Administrative Agent's internet delivery system that is part of SSB Direct,
Global Fixed Income's primary web portal. Although the primary web portal is
secured with a dual firewall and a User ID/Password Authorization System and the
Platform is secured through a single user per deal authorization method whereby
each user may access the Platform only on a deal-by-deal basis, the Borrower
acknowledges that (i) the distribution of material through an electronic medium
is not necessarily secure and that there are confidentiality and other risks
associated with such distribution, (ii) the Platform is provided "as is" and "as
available" and (iii) neither the Administrative Agent nor any of its Affiliates
warrants the accuracy, adequacy or completeness of the Communications or the
Platform and each expressly disclaims liability for errors or omissions in the
Communications or the Platform. No warranty of any kind, express, implied or
statutory, including, without limitation, any warranty of merchantability,
fitness for a particular purpose, non-infringement of third party rights or
freedom from viruses or other code defects, is made by the Administrative Agent
or any of its Affiliates in connection with the Platform.

(c) Each Lender agrees that notice to it (as provided in the next
sentence) (a "Notice") specifying that any Communications have been posted to
the Platform shall constitute effective delivery of such information, documents
or other materials to such Lender for purposes of this Agreement; provided,
that, if requested by any Lender, the Administrative Agent shall deliver a copy
of the Communications to such Lender by e-mail or telecopier. Each Lender agrees
(i) to notify the Administrative Agent in writing of such Lender's e-mail
address to which a Notice may be sent by electronic transmission (including by
electronic communication) on or before the date such Lender

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becomes a party to this Agreement (and from time to time thereafter to ensure
that the Administrative Agent has on record an effective e-mail address for such
Lender) and (ii) that any Notice may be sent to such e-mail address. For
purposes of this Section 8.02(c), the term "Notices" shall only include notices
to be given regarding materials delivered in accordance with Section 8.02(b).

SECTION 8.03. No Waiver; Remedies. No failure on the part of
any Lender or Agent to exercise, and no delay in exercising, any right hereunder
or under any Note or CAF Note shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.

SECTION 8.04. Costs and Expenses. (a) The Borrower agrees to
pay on demand all reasonable costs and expenses of each Agent and the Lead
Arranger in connection with the preparation, execution, delivery,
administration, modification and amendment of this Agreement, the Notes (if any)
and the other documents to be delivered hereunder, including, without
limitation, (A) all reasonable due diligence, syndication (including printing,
distribution and bank meetings), computer and duplication expenses and (B) the
reasonable fees and expenses of counsel for each Agent and the Lead Arranger
with respect thereto and with respect to advising each Agent as to its rights
and responsibilities under this Agreement. The Borrower further agrees to pay on
demand all costs and expenses of each Agent and the Lenders, if any (including,
without limitation, reasonable counsel fees and expenses), in connection with
the enforcement (whether through negotiations, legal proceedings or otherwise)
of this Agreement, the Notes (if any) and the other documents to be delivered
hereunder, including, without limitation, reasonable fees and expenses of
counsel for each Agent, the Lead Arranger and each Lender in connection with the
enforcement of rights under this Section 8.04(a).

(b) The Borrower agrees to indemnify and hold harmless each Agent, the
Lead Arranger and each Lender and each of their Affiliates and their officers,
directors, employees, agents and advisors (each, an "Indemnified Party") from
and against any and all claims, damages, losses, liabilities and reasonable
expenses (including, without limitation, reasonable fees and expenses of
counsel) incurred by or asserted or awarded against any Indemnified Party, in
each case arising out of or in connection with or by reason of (including,
without limitation, in connection with any investigation, litigation or
proceeding or preparation of a defense in connection therewith) (i) the Notes or
CAF Notes (if any), this Agreement, any of the transactions contemplated herein
or the actual or proposed use of the proceeds of the Advances or (ii) the actual
or alleged presence of Hazardous Materials on any property of the Borrower or
any of its Subsidiaries or any Environmental Action relating in any way to the
Borrower or any of its Subsidiaries, except to the extent such claim, damage,
loss, liability or expense is found in a final, non-appealable judgment by a
court of competent jurisdiction to have resulted from such Indemnified Party's
gross negligence or willful misconduct. In the case of an investigation,
litigation or other proceeding to which the indemnity in this Section 8.04(b)
applies, such indemnity shall be effective whether or not such investigation,
litigation or proceeding is brought by the Borrower, its directors,
equityholders or creditors or an Indemnified Party or any other Person, whether
or not any Indemnified Party is otherwise a party thereto and whether or not the
transactions contemplated hereby are consummated. The Borrower also agrees not
to assert any claim for special, indirect, consequential or punitive damages
against any Agent, any Lender, any of their Affiliates, or any of their
respective directors, officers, employees, attorneys and agents, on any theory
of liability arising out of or otherwise relating to the Notes or CAF Notes (if
any), this Agreement, any of the transactions contemplated herein or the actual
or proposed use of the proceeds of the Advances.

(c) If any payment of principal of, or Conversion of, any Eurodollar
Rate Advance or CAF Eurodollar Rate Advance is made by the Borrower to or for
the account of a Lender other than on the last day of the Interest Period for
such Advance, as a result of a payment or Conversion pursuant to Sections
2.09(d) or (e), 2.11 or 2.13, acceleration of the maturity of the Notes or CAF
Notes (if any), as the case may be, pursuant to Section 6.01 or for any other
reason, the Borrower shall, upon demand by such Lender (with a copy of such
demand to the Administrative Agent), pay to the Administrative Agent for the
account of such Lender any amounts required to compensate such Lender for any
additional losses, costs or expenses that it may reasonably incur as a result of
such payment or Conversion, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by any Lender to fund or maintain such Advance.

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(d) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
Sections 2.12, 2.15 and 8.04 shall survive the payment in full of principal,
interest and all other amounts payable hereunder and under the Notes or CAF
Notes (if any).

SECTION 8.05. Right of Set-off. Upon (i) the occurrence and
during the continuance of any Event of Default and (ii) the making of the
request or the granting of the consent specified by Section 6.01 to authorize
the Administrative Agent to declare the Notes or CAF Notes, if any, due and
payable pursuant to the provisions of Section 6.01, each Lender and each of its
Affiliates is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Lender or such Affiliate to or for
the credit or the account of the Borrower against any and all of the obligations
of the Borrower now or hereafter existing under this Agreement and the Note or
CAF Note, as the case may be, held by such Lender, whether or not such Lender
shall have made any demand under this Agreement or such Note or CAF Note and
although such obligations may be unmatured. Each Lender agrees promptly to
notify the Borrower after any such set-off and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of each Lender and its Affiliates under this Section are
in addition to other rights and remedies (including, without limitation, other
rights of set-off) that such Lender and its Affiliates may have.

SECTION 8.06. Binding Effect. This Agreement shall become
effective (other than Sections 2.01 and 2.03, which shall only become effective
upon satisfaction of the conditions precedent set forth in Section 3.01) when it
shall have been executed by the Borrower and each Agent and when the
Administrative Agent shall have been notified by each Initial Lender that such
Initial Lender has executed it and thereafter shall be binding upon and inure to
the benefit of the Borrower, each Agent and each Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Lenders.

SECTION 8.07. Assignments and Participations. (a) Each Lender
may assign to one or more Persons all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Commitment, the Revolving Advances owing to it and the Note or Notes, if any,
held by it); provided, however, that (i) each such assignment shall be of a
constant, and not a varying, percentage of all rights and obligations under this
Agreement (other than any right to make CAF Advances, CAF Advances owing to it
and CAF Note or CAF Notes, if any), (ii) except in the case of an assignment to
a Person that, immediately prior to such assignment, was a Lender or an
assignment of all of a Lender's rights and obligations under this Agreement, the
amount of the Commitment of the assigning Lender being assigned pursuant to each
such assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $10,000,000 or an
integral multiple of $1,000,000 in excess thereof, (iii) each such assignment
shall be to an Eligible Assignee, (iv) the parties to each such assignment shall
execute and deliver to the Administrative Agent, for its acceptance and
recording in the Register, an Assignment and Acceptance, together with any Note,
if any, subject to such assignment, and (v) the parties to each such assignment
shall deliver to the Administrative Agent a processing and recordation fee of
$3,500. Upon such execution, delivery, acceptance and recording, from and after
the effective date specified in each Assignment and Acceptance, (x) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, have the rights and obligations of a Lender hereunder and (y) the
Lender assignor thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights (other than its rights under Sections 2.13, 2.16 and 8.04
to the extent any claim thereunder relates to an event arising prior to such
assignment) and be released from its obligations under this Agreement (and, in
the case of an Assignment and Acceptance covering all or the remaining portion
of an assigning Lender's rights and obligations under this Agreement, such
Lender shall cease to be a party hereto).

(b) By executing and delivering an Assignment and Acceptance, the
Lender assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than as provided
in such Assignment and Acceptance, such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto; (ii) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Borrower or

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the performance or observance by the Borrower of any of its obligations under
this Agreement or any other instrument or document furnished pursuant hereto;
(iii) such assignee confirms that it has received a copy of this Agreement,
together with copies of the financial statements referred to in Section 4.01 and
such other documents and information as it has deemed appropriate to make its
own credit analysis and decision to enter into such Assignment and Acceptance;
(iv) such assignee will, independently and without reliance upon any Agent, such
assigning Lender or any other Lender and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement; (v) such assignee
confirms that it is an Eligible Assignee; (vi) such assignee appoints and
authorizes each Agent to take such action as agent on its behalf and to exercise
such powers and discretion under this Agreement as are delegated to such Agent
by the terms hereof, together with such powers and discretion as are reasonably
incidental thereto; and (vii) such assignee agrees that it will perform in
accordance with their terms all of the obligations that by the terms of this
Agreement are required to be performed by it as a Lender.

(c) The Administrative Agent shall maintain at its address referred to
in Section 8.02 a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and addresses of
the Lenders and the Commitment of, and principal amount of the Advances owing
to, each Lender from time to time (the "Register"). The entries in the Register
shall be prima facie evidence of the correctness thereof, and the Borrower, the
Agents and the Lenders may treat each Person whose name is recorded in the
Register as a Lender hereunder for all purposes of this Agreement. The Register
shall be available for inspection by the Borrower or any Lender at any
reasonable time and from time to time upon reasonable prior notice.

(d) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee representing that it is an Eligible Assignee,
together with any Note, if any, subject to such assignment, the Administrative
Agent shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit C hereto, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to the Borrower. Within five Business Days
after its receipt of such notice, the Borrower, at its own expense, shall
execute and deliver to the Administrative Agent in exchange for the surrendered
Note a new Note to the order of such Eligible Assignee in an amount equal to the
Commitment assumed by it pursuant to such Assignment and Acceptance and, if the
assigning Lender has retained a Commitment hereunder, a new Note to the order of
the assigning Lender in an amount equal to the Commitment retained by it
hereunder. Such new Note shall be in an aggregate principal amount equal to the
aggregate principal amount of such surrendered Note or Notes, shall be dated the
effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of Exhibit A hereto.

(e) Each Lender may sell participations to one or more banks or other
entities (other than the Borrower or any of its Affiliates) in or to all or a
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Commitment, the Advances owing to it and the
Note or Notes, if any, held by it); provided, however, that (i) such Lender's
obligations under this Agreement (including, without limitation, its Commitment
to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Lender shall remain the holder of any such Note for all
purposes of this Agreement, (iv) the Borrower, the Agents and the other Lenders
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement and (v) no participant
under any such participation shall have any right to approve any amendment or
waiver of any provision of this Agreement or any Note, or any consent to any
departure by the Borrower therefrom, except to the extent that such amendment,
waiver or consent would reduce the principal of, or interest on, the Notes or
any fees or other amounts payable hereunder, in each case to the extent subject
to such participation, or postpone any date fixed for any payment of principal
of, or interest on, the Notes or any fees or other amounts payable hereunder, in
each case to the extent subject to such participation.

(f) Any Lender may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 8.07, disclose
to the assignee or participant or proposed assignee or participant, any
information relating to the Borrower furnished to such Lender by or on behalf of
the Borrower; provided that, prior to any such disclosure, the assignee or
participant or proposed assignee or participant shall agree to preserve the
confidentiality of any Confidential Information relating to the Borrower
received by it from such Lender.

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(g) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time and without the consent of the Borrower or any Agent
(i) create a security interest in all or any portion of its rights under this
Agreement (including, without limitation, the Advances owing to it and the Note
or Notes held by it) in favor of any Federal Reserve Bank in accordance with
Regulation A of the Board of Governors of the Federal Reserve System, and (ii)
with notice to the Borrower and the Administrative Agent, assign all or part of
its rights and obligations under this Agreement to any of its Affiliates.

(h) In the event that any Lender requests payments of reimbursement,
compensation or indemnification from the Borrower pursuant to Sections 2.02,
2.12 or 2.15 herein, then the Borrower shall have the right, but not the
obligation, at its own expense, upon 5 Business Days notice to such Lender and
the Administrative Agent, to replace such Lender with an assignee (in accordance
with and subject to the restrictions contained in paragraphs (a) and (b) above),
and such Lender hereby agrees to transfer and assign without recourse (in
accordance with and subject to the restrictions contained in paragraphs (a) and
(b) above) all its interests, rights and obligations in respect of its
Commitment to such assignee; provided, however, that (i) no such assignment
shall conflict with any law, rule and regulation or order of any governmental
authority, (ii) no Default has occurred or is continuing, (iii) the Borrower has
satisfied all of its obligations under this Agreement relating to such assigning
Lender through the date of such assignment, (iv) the Borrower shall pay to the
Administrative Agent the administrative fee in the amount of $3,500 if such
replacement Lender assignee is not an existing Lender, and (v) such assignee
shall pay to such assigning Lender in immediately available funds on the date of
such assignment the principal of and interest accrued to the date of payment on
the Advances made by such Lender hereunder and the Borrower, the Administrative
Agent or such assignee, as applicable, shall pay to such Lender all other
amounts accrued for such Lender's account or owed to it hereunder.

SECTION 8.08. Collateral. The Lenders acknowledge and agree
that their rights under the Pledge Agreement will be limited as set forth
therein. In particular, the rights of the Lenders under the Pledge Agreement
will be limited to their right to share in the proceeds of the Collateral as
provided therein, and they shall have no rights to direct actions of the
Collateral Agent thereunder. The security interest in the Collateral to be
granted in favor of the Lenders shall be automatically released at such time as
the security interest granted therein in favor of the Bridge Secured Parties (as
defined in the Pledge Agreement) has been released and terminated in accordance
with the terms of the Pledge Agreement.

SECTION 8.09. Confidentiality. Neither Agent nor any Lender
shall disclose any Confidential Information to any other Person without the
consent of the Borrower, other than (a) to such Agent's or such Lender's
Affiliates and their officers, directors, employees, agents and advisors and, as
contemplated by Section 8.07(f), to actual or prospective assignees and
participants, and then only on a confidential basis, (b) as required by any law,
rule or regulation or judicial process and (c) as requested or required by any
state, federal or foreign authority or examiner regulating banks or banking or
any other regulatory or self-regulatory authorities. The Borrower may disclose
to any and all Persons, without limitation of any kind, the U.S. tax treatment
and U.S. tax structure of the transactions contemplated by this Agreement and
all materials of any kind (including opinions or other tax analyses) that are
provided to the Borrower relating to such U.S. tax treatment and U.S. tax
structure.

SECTION 8.10. Governing Law. This Agreement and the Notes (if
any) shall be governed by, and construed in accordance with, the laws of the
State of New York.

SECTION 8.11. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.

SECTION 8.12. Jurisdiction, Etc. (a) Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the Notes or CAF Notes (if any), or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such

CERC 364-Day Revolving Credit Agreement

44

New York State court or, to the extent permitted by law, in such federal court.
Each of the parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Nothing in this
Agreement shall affect any right that any party may otherwise have to bring any
action or proceeding relating to this Agreement or the Notes or CAF Notes (if
any) in the courts of any jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the Notes or CAF
Notes (if any) in any New York State or federal court. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.

CERC 364-Day Revolving Credit Agreement

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.

FOR VALUE RECEIVED, the undersigned, CENTERPOINT ENERGY
RESOURCES CORP., a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY
to the order of _________________________ (the "Lender") for the account of its
Applicable Lending Office on the Termination Date (each as defined in the Credit
Agreement referred to below) the principal sum of U.S.$[amount of the Lender's
Commitment in figures] or, if less, the aggregate principal amount of the
Revolving Advances made by the Lender to the Borrower pursuant to the Credit
Agreement dated as of March 25, 2003 among the Borrower, the Lenders listed on
the signature pages thereto, Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc., as Lead Arrangers and Joint Bookrunners, Citicorp North
America, Inc. as Collateral Agent and Citicorp USA, Inc., as Administrative
Agent for the Lenders (as amended or modified from time to time, the "Credit
Agreement"; the terms defined therein being used herein as therein defined)
outstanding on the Termination Date.

The Borrower promises to pay interest on the unpaid principal
amount of each Revolving Advance from the date of such Revolving Advance until
such principal amount is paid in full, at such interest rates, and payable at
such times, as are specified in the Credit Agreement.

Both principal and interest are payable in lawful money of the
United States of America to Citicorp USA, Inc., as Administrative Agent, at Two
Penns Way, Suite 200, New Castle, Delaware, 19720, in same day funds. Each
Revolving Advance owing to the Lender by the Borrower pursuant to the Credit
Agreement, and all payments made on account of principal thereof, shall be
recorded by the Lender and, prior to any transfer hereof, endorsed on the grid
attached hereto which is part of this Promissory Note.

This Promissory Note is one of the Notes referred to in, and
is entitled to the benefits of, the Credit Agreement. The Credit Agreement,
among other things, (i) provides for the making of Revolving Advances by the
Lender to the Borrower from time to time in an aggregate amount not to exceed at
any time outstanding the U.S. dollar amount first above mentioned, the
indebtedness of the Borrower resulting from each such Revolving Advance being
evidenced by this Promissory Note, and (ii) contains provisions for acceleration
of the maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon the
terms and conditions therein specified.

The undersigned, CENTERPOINT ENERGY RESOURCES CORP., refers to
the Credit Agreement, dated as of March 25, 2003 (as amended or modified from
time to time, the "Credit Agreement", the terms defined therein being used
herein as therein defined), among the undersigned, the Lenders listed on the
signature pages thereto, Salomon Smith Barney Inc. and J.P. Morgan Securities
Inc., as Lead Arrangers and Joint Bookrunners, Citicorp North America, Inc., as
Collateral Agent and Citicorp USA, Inc., as Administrative Agent for said
Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of
the Credit Agreement that the undersigned hereby requests a Revolving Borrowing
under the Credit Agreement, and in that connection sets forth below the
information relating to such Revolving Borrowing (the "Proposed Borrowing") as
required by Section 2.02(a) of the Credit Agreement:

(i) The Business Day of the Proposed Revolving Borrowing
is _______________, 20__.

(iii) The aggregate amount of the Proposed Revolving
Borrowing is $_______________.

(iv) [The initial Interest Period for each Eurodollar Rate
Advance made as part of the Proposed Revolving Borrowing is __________
[week][month][s].]

(v) All or a portion of the Proposed Revolving Borrowing
[will][will not] be used to repay commercial paper.

The undersigned hereby certifies that the following statements
are true on the date hereof, and will be true on the date of the Proposed
Revolving Borrowing:

(A) the representations and warranties contained
in Section 4.01 (other than, in the case of any Revolving Borrowing,
all or a portion of the proceeds of which shall be applied to repay
commercial paper of the Borrower or its Subsidiaries, Section 4.01(e)
and (f)) of the Credit Agreement are correct, before and after giving
effect to the Proposed Revolving Borrowing and to the application of
the proceeds therefrom, as though made on and as of such date (except
to the extent such representations are limited to a prior date);

(B) no event has occurred and is continuing, or
would result from such Proposed Revolving Borrowing or from the
application of the proceeds therefrom, that constitutes a Default; and

CERC 364-Day Revolving Credit Agreement

(C) the Borrower is Solvent.

Very truly yours,

CENTERPOINT ENERGY RESOURCES CORP.

By _______________________________

Title:(1)

(1) Signatory must be a Financial Officer, as defined in the Credit
Agreement.

CERC 364-Day Revolving Credit Agreement

EXHIBIT C - FORM OF

ASSIGNMENT AND ACCEPTANCE

Reference is made to the Credit Agreement dated as of March
25, 2003 (as amended or modified from time to time, the "Credit Agreement")
among CENTERPOINT ENERGY RESOURCES CORP., a Delaware corporation (the
"Borrower"), the Lenders (as defined in the Credit Agreement), Salomon Smith
Barney Inc. and J.P. Morgan Securities Inc., as Lead Arrangers and Joint
Bookrunners, Citicorp North America, Inc., as Collateral Agent and Citicorp USA,
Inc., as Administrative Agent for the Lenders (the "Administrative Agent").
Terms defined in the Credit Agreement are used herein with the same meaning.

The "Assignor" and the "Assignee" referred to on Schedule 1
hereto agree as follows:

1. The Assignor hereby sells and assigns to the Assignee, and
the Assignee hereby purchases and assumes from the Assignor, an
interest in and to the Assignor's rights and obligations under the
Credit Agreement as of the date hereof (other than in respect of CAF
Advances and CAF Notes) equal to the percentage interest specified on
Schedule 1 hereto of all outstanding rights and obligations under the
Credit Agreement (other than in respect of CAF Advances and CAF Notes).
After giving effect to such sale and assignment, the Assignee's
Commitment and the amount of the Revolving Advances owing to the
Assignee will be as set forth on Schedule 1 hereto.

2. The Assignor (i) represents and warrants that it is the
legal and beneficial owner of the interest being assigned by it
hereunder and that such interest is free and clear of any adverse
claim; (ii) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with the Credit Agreement or
the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Credit Agreement or any other instrument or
document furnished pursuant thereto; (iii) makes no representation or
warranty and assumes no responsibility with respect to the financial
condition of the Borrower or the performance or observance by the
Borrower of any of its obligations under the Credit Agreement or any
other instrument or document furnished pursuant thereto; and (iv)
attaches the Note (if any) held by the Assignor and requests that the
Administrative Agent exchange such Note for a new Note payable to the
order of the Assignee in an amount equal to the Commitment assumed by
the Assignee pursuant hereto or new Notes payable to the order of the
Assignee in an amount equal to the Commitment assumed by the Assignee
pursuant hereto and the Assignor in an amount equal to the Commitment
retained by the Assignor under the Credit Agreement, respectively, as
specified on Schedule 1 hereto.

3. The Assignee (i) confirms that it has received a copy of
the Credit Agreement, together with copies of the financial statements
referred to in Section 4.01 thereof and such other documents and
information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance;
(ii) agrees that it will, independently and without reliance upon any
Agent, the Assignor or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make
its own credit decisions in taking or not taking action under the
Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv)
appoints and authorizes each Agent to take such action as such Agent on
its behalf and to exercise such powers and discretion under the Credit
Agreement as are delegated to such Agent by the terms thereof, together
with such powers and discretion as are reasonably incidental thereto;
(v) agrees that it will perform in accordance with their terms all of
the obligations that by the terms of the Credit Agreement are required
to be performed by it as a Lender; and (vi) attaches any U.S. Internal
Revenue Service forms required under Section 2.15 of the Credit
Agreement.

4. Following the execution of this Assignment and Acceptance,
it will be delivered to the Administrative Agent for acceptance and
recording by the Administrative Agent. The effective date for this
Assignment and Acceptance (the "Effective Date") shall be the date of
acceptance hereof by the Administrative Agent, unless otherwise
specified on Schedule 1 hereto.

5. Upon such acceptance and recording by the Administrative
Agent, as of the Effective Date, (i) the Assignee shall be a party to
the Credit Agreement and, to the extent provided in this Assignment and

CERC 364-Day Revolving Credit Agreement

Acceptance, have the rights and obligations of a Lender thereunder and
(ii) the Assignor shall, to the extent provided in this Assignment and
Acceptance, relinquish its rights and be released from its obligations
under the Credit Agreement.

6. Upon such acceptance and recording by the Administrative
Agent, from and after the Effective Date, the Administrative Agent
shall make all payments under the Credit Agreement and the Notes (if
any) in respect of the interest assigned hereby (including, without
limitation, all payments of principal, interest and facility fees with
respect thereto) to the Assignee. The Assignor and Assignee shall make
all appropriate adjustments in payments under the Credit Agreement and
the Notes (if any) for periods prior to the Effective Date directly
between themselves.

7. This Assignment and Acceptance shall be governed by, and
construed in accordance with, the laws of the State of New York.

8. This Assignment and Acceptance may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the
same agreement. Delivery of an executed counterpart of Schedule 1 to
this Assignment and Acceptance by telecopier shall be effective as
delivery of a manually executed counterpart of this Assignment and
Acceptance.

IN WITNESS WHEREOF, the Assignor and the Assignee have caused
Schedule 1 to this Assignment and Acceptance to be executed by their officers
thereunto duly authorized as of the date specified thereon.

Accepted [and Approved](2) this
__________ day of _______________, 20__

CITICORP USA, INC., as Administrative Agent

By ________________________
Title:

[Approved this __________ day of _______________, 20__

(1) This date should be no earlier than five Business Days after the
delivery of this Assignment and Acceptance to the Agent.

(2) Required if the Assignee is an Eligible Assignee solely by reason of
clause (iii) of the definition of "Eligible Assignee".

CERC 364-Day Revolving Credit Agreement

CENTERPOINT ENERGY RESOURCES CORP.

By ________________________](1)
Title:

(1) Required if the Assignee is an Eligible Assignee solely by reason of
clause (iii) of the definition of "Eligible Assignee".

CERC 364-Day Revolving Credit Agreement

EXHIBIT D - FORM OF

CAF NOTE

U.S.$_______________ Dated: _______________, 200_

FOR VALUE RECEIVED, the undersigned, CENTERPOINT ENERGY
RESOURCES CORP., a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY
to the order of _________________________ (the "Lender") for the account of its
Applicable Lending Office (as defined in the Credit Agreement dated as of March
25, 2003 among the Borrower, the Lenders listed on the signature pages thereto,
Salomon Smith Barney Inc. and J.P. Morgan Securities Inc., as Lead Arrangers and
Joint Bookrunners, Citicorp North America, Inc., as Collateral Agent and
Citicorp USA, Inc., as Administrative Agent for the Lenders (as amended or
modified from time to time, the "Credit Agreement"; the terms defined therein
being used herein as therein defined)), on _______________, 200_, the principal
amount of U.S.$_______________.

The Borrower promises to pay interest on the unpaid principal
amount hereof from the date hereof until such principal amount is paid in full,
at the interest rate and payable on the interest payment date or dates provided
below:

Interest Rate: _____% per annum (calculated on the basis of a
year of 360 days for the actual number of days elapsed).

Both principal and interest are payable in lawful money of the
United States of America to _________________________ for the account of the
Lender at the office of _________________________, at _________________________
in same day funds.

This Promissory Note is one of the CAF Notes referred to in,
and is entitled to the benefits of, the Credit Agreement. The Credit Agreement,
among other things, contains provisions for acceleration of the maturity hereof
upon the happening of certain stated events.

The Borrower hereby waives presentment, demand, protest and
notice of any kind. No failure to exercise, and no delay in exercising, any
rights hereunder on the part of the holder hereof shall operate as a waiver of
such rights.

This Promissory Note shall be governed by, and construed in
accordance with, the laws of the State of New York.

Reference is made to the Credit Agreement, dated as of March
25, 2003 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among the undersigned, the Lenders listed on the signature
pages thereto, Salomon Smith Barney Inc. and J.P. Morgan Securities Inc., as
Lead Arrangers and Joint Bookrunners, Citicorp North America, Inc., as
Collateral Agent and Citicorp USA, Inc., as Administrative Agent for said
Lenders. Terms defined in the Credit Agreement are used herein as therein
defined.

This is a Competitive Bid Request pursuant to Section 2.04 of
the Credit Agreement requesting quotes for the following:

Reference is made to the Credit Agreement, dated as of March
25, 2003 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among the undersigned, the Lenders listed on the signature
pages thereto, Salomon Smith Barney Inc. and J.P. Morgan Securities Inc., as
Lead Arrangers and Joint Bookrunners, Citicorp North America, Inc., as
Collateral Agent and Citicorp USA, Inc., as Administrative Agent for said
Lenders. Terms defined in the Credit Agreement are used herein as therein
defined.

In accordance with Section 2.04(b) of the Credit Agreement,
the undersigned Lender offers to make a CAF Advance thereunder in the following
amounts with the following maturity dates:

Reference is made to the Credit Agreement, dated as of March
25, 2003 (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among the undersigned, the Lenders listed on the signature
pages thereto, Salomon Smith Barney Inc. and J.P. Morgan Securities Inc., as
Lead Arrangers and Joint Bookrunners, Citicorp North America, Inc., as
Collateral Agent and Citicorp USA, Inc., as Administrative Agent for said
Lenders. Terms defined in the Credit Agreement are used herein as therein
defined.

In accordance with Section 2.04(d) of the Credit Agreement,
the undersigned accepts and confirms the offers by the Lender[s] to make CAF
Advances to the undersigned on ___________, 200_ under said Section 2.04(d) in
the [respective] amount[s] set forth on the attached list of CAF Advances
offered.

By delivery of this Competitive Bid Confirmation and the
acceptance of any or all of the CAF Advances offered by the Lenders in response
to this Competitive Bid Confirmation, the undersigned shall be deemed to have
represented and warranted that the relevant conditions to making CAF Advances in
Section 3.03 of the Credit Agreement have been satisfied with respect to such
CAF Advances.

Very truly yours,

CENTERPOINT ENERGY RESOURCES CORP.,

as Borrower

By ________________________________

Title:

Dated:________________

[Borrower to attach CAF Advances offer list prepared by the Administrative Agent
with accepted amount entered by the Borrower to the right of each CAF Advance
offer]

PLEDGE AGREEMENT dated [__], 2003 made by CENTERPOINT ENERGY
RESOURCES CORP., a Delaware corporation (the "GRANTOR"), to CITICORP NORTH
AMERICA, INC., as collateral agent (in such capacity, together with any
successor collateral agent, the "COLLATERAL AGENT") for the Secured Parties
(defined below).

PRELIMINARY STATEMENTS.

(1) The Grantor has entered into a U.S.$200,000,000
Credit Agreement, dated March 25, 2003 (said Credit Agreement, as it may
hereafter be amended, amended and restated, supplemented or otherwise modified
from time to time, being the "REVOLVING CREDIT AGREEMENT") among the Grantor, as
borrower, Salomon Smith Barney, Inc. and J.P. Morgan Securities Inc. as lead
arrangers (the "REVOLVER ARRANGERS"), Wachovia Bank, National Association and
Banc One Capital Markets, Inc., as co-syndication agents, Credit Suisse First
Boston, Cayman Islands Branch, as documentation agent, Citicorp USA, Inc., as
administrative agent (the "REVOLVER AGENT") and the lenders listed on the
signature pages thereto (the "REVOLVER LENDERS" and, together with the Revolver
Arrangers and the Revolver Agent, the "REVOLVER SECURED PARTIES").

(2) The Grantor has also entered into a Bridge Credit
Agreement, dated March [__], 2003 (said Bridge Credit Agreement, as it may
hereafter be amended, amended and restated, supplemented or otherwise modified
from time to time, being the "BRIDGE CREDIT AGREEMENT" and, together with the
Revolving Credit Agreement, the "CREDIT AGREEMENTS") among the Grantor, as
borrower, Citicorp North America, Inc., as administrative agent (the "BRIDGE
AGENT"), Salomon Smith Barney, Inc. as lead arranger (the "BRIDGE ARRANGER") and
the lenders listed on the signature pages thereto (the "BRIDGE LENDERS" and,
together with the Bridge Agent and the Bridge Arranger, the "BRIDGE SECURED
PARTIES" and, together with the Revolver Secured Parties, the "SECURED
PARTIES"). Terms defined in the Credit Agreements and not otherwise defined in
this Agreement are used in this Agreement as defined in the applicable Credit
Agreement.

(3) Pursuant to the Credit Agreements, the Grantor is
entering into this Agreement in order to grant to the Collateral Agent for the
ratable benefit of the Secured Parties a security interest in the Collateral (as
hereinafter defined).

(4) The Grantor is the owner of the shares of stock or
other equity interests (the "INITIAL PLEDGED EQUITY") set forth opposite the
Grantor's name on and as otherwise described in Schedule II hereto and issued by
the Persons named therein and of the indebtedness (the "INITIAL PLEDGED DEBT")
set forth opposite such Grantor's name on and as otherwise described in Part II
of Schedule II hereto and issued by the obligors named therein.

(5) It is a condition precedent to the making of Advances
by the Bridge Lenders under the Bridge Credit Agreement and the making of
further Advances by the Revolver Lenders under the Revolving Credit Agreement
that the Grantor shall have granted the assignment and security interest and
made the pledge and assignment contemplated by this Agreement.

CERC - Pledge Agreement

2

(6) Unless otherwise defined in this Agreement or in the
Credit Agreements, terms defined in Article 8 or 9 of the UCC (as defined below)
are used in this Agreement as such terms are defined in such Article 8 or 9.
"UCC" means the Uniform Commercial Code as in effect, from time to time, in the
State of New York; provided that, if perfection or the effect of perfection or
non-perfection or the priority of any security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, "UCC" means the Uniform Commercial Code as in effect
from time to time in such other jurisdiction for purposes of the provisions
hereof relating to such perfection, effect of perfection or non-perfection or
priority.

NOW, THEREFORE, in consideration of the premises and in order
to induce the Bridge Lenders to make Advances under the Bridge Credit Agreement
and to induce the Revolver Lenders to make further Advances under the Revolving
Credit Agreement, the Grantor hereby agrees with the Collateral Agent for the
ratable benefit of the Secured Parties as follows:

Section 1. Grant of Security. The Grantor hereby grants
to the Collateral Agent, for the ratable benefit of the Secured Parties, a
security interest in, the Grantor's right, title and interest in and to the
following, in each case, as to each type of property described below, whether
now owned or hereafter acquired by the Grantor, wherever located, and whether
now or hereafter existing or arising (collectively, the "COLLATERAL"):

(a) the following (the "SECURITY COLLATERAL"):

(i) the Initial Pledged Equity and the
certificates, if any, representing the Initial Pledged Equity,
and all dividends, distributions, return of capital, cash,
instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in
exchange for any or all of the Initial Pledged Equity and all
subscription warrants, rights or options issued thereon or
with respect thereto;

(ii) all additional shares of stock and other
Equity Interests of or in any issuer of the Initial Pledged
Equity or any successor entity from time to time acquired by
the Grantor in any manner (such shares and other Equity
Interests, together with the Initial Pledged Equity, being the
"PLEDGED EQUITY"), and the certificates, if any, representing
such additional shares or other Equity Interests, and all
dividends, distributions, return of capital, cash, instruments
and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or
all of such shares or other Equity Interests and all
subscription warrants, rights or options issued thereon or
with respect thereto;

(iii) the Initial Pledged Debt and the
instruments, if any, evidencing the Initial Pledged Debt, and
all interest, cash, instruments and other property from time
to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Initial
Pledged Debt; and

(b) all proceeds of, collateral for, income and other
payments now or hereafter due and payable with respect to, and
supporting obligations relating to, any and all of the

CERC - Pledge Agreement

3

Collateral (including, without limitation, proceeds, collateral and
supporting obligations that constitute property of the types described
in clause (a) of this Section 1 and this clause (b)).

Section 2. Security for Obligations. This Agreement
secures, in the case of the Grantor, the payment of all obligations of the
Grantor now or hereafter existing under the Loan Documents, as defined in the
Bridge Credit Agreement ("BRIDGE OBLIGATIONS") and under the Loan Documents, as
defined in the Revolving Credit Agreement ("REVOLVER OBLIGATIONS"), whether
direct or indirect, absolute or contingent, and whether for principal,
reimbursement obligations, interest, fees, premiums, penalties,
indemnifications, contract causes of action, costs, expenses or otherwise (all
such obligations being the "SECURED OBLIGATIONS").

Section 3. Delivery and Control of Security Collateral.
(a) All certificates or instruments representing or evidencing Security
Collateral shall be delivered to and held by or on behalf of the Collateral
Agent pursuant hereto and shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer or assignment in
blank, all in form and substance satisfactory to the Collateral Agent. The
Collateral Agent shall have the right, at any time after the occurrence and
during the continuation of an Event of Default, in its reasonable discretion and
without notice to the Grantor, to transfer to or to register in the name of the
Collateral Agent or any of its nominees any or all of the Security Collateral,
subject only to the revocable rights specified in Section 7(a). In addition,
after the occurrence and during the continuation of an Event of Default, the
Collateral Agent shall have the right to exchange certificates or instruments
representing or evidencing Security Collateral for certificates or instruments
of smaller or larger denominations.

(b) With respect to any Security Collateral in which the
Grantor has any right, title or interest and that constitutes an uncertificated
security, the Grantor will cause the issuer thereof either (i) to register the
Collateral Agent as the registered owner of such security or (ii) to agree in an
authenticated record with the Grantor and the Collateral Agent that such issuer
will comply with instructions with respect to such security originated by the
Collateral Agent without further consent of the Grantor, such authenticated
record to be in form and substance satisfactory to the Collateral Agent. With
respect to any Security Collateral in which the Grantor has any right, title or
interest and that is not an uncertificated security, upon the request of the
Collateral Agent upon the occurrence and during the continuance of an Event of
Default, the Grantor will notify each such issuer of Pledged Equity that such
Pledged Equity is subject to the security interest granted hereunder.

(c) Upon the request of the Collateral Agent, such
Grantor will notify the issuer of the Initial Pledged Debt that such Initial
Pledged Debt is subject to the security interest granted hereunder.

Section 4. Representations and Warranties. The Grantor
represents and warrants as follows:

(a) The Grantor's exact legal name, as defined in Section
9-503(a) of the UCC, is correctly set forth in Schedule 1 hereto. The
Grantor is located (within the meaning of Section 9-307 of the UCC) and
has its chief executive office in the state or

CERC - Pledge Agreement

4

jurisdiction set forth in Schedule I hereto. The information set forth
in Schedule I hereto with respect to the Grantor is true and accurate
in all respects. The Grantor has not previously changed its name,
location, chief executive office, type of organization, jurisdiction of
organization or organizational identification number from those set
forth in Schedule I hereto except as disclosed in Schedule III hereto.

(b) The Grantor is the legal and beneficial owner of the
Collateral of the Grantor free and clear of any Lien, claim, option or
right of others, except for the security interest created under this
Agreement or as otherwise permitted under each Credit Agreement. No
effective financing statement or other instrument similar in effect
covering all or any part of such Collateral or listing the Grantor or
any trade name of the Grantor as debtor is on file in any recording
office, except such as may have been filed in favor of the Collateral
Agent relating to the Loan Documents or as otherwise permitted under
each Credit Agreement.

(c) The Pledged Equity pledged by the Grantor hereunder
has been duly authorized and validly issued and is fully paid and
non-assessable. With respect to any Pledged Equity that is an
uncertificated security, the Grantor has caused the issuer thereof
either (i) to register the Collateral Agent as the registered owner of
such security or (ii) to agree in an authenticated record with the
Grantor and the Collateral Agent that such issuer will, upon the
occurrence and during the continuation of an Event of Default, comply
with instructions with respect to such security originated by the
Collateral Agent without further consent of the Grantor. The Initial
Pledged Debt pledged by such Grantor hereunder has been duly
authorized, authenticated or issued and delivered, is the legal, valid
and binding obligation of the issuers thereof, is evidenced by one or
more promissory notes (which notes have been delivered to the
Collateral Agent) and is not in default.

(d) The Initial Pledged Equity pledged by the Grantor
constitutes the percentage of the issued and outstanding Equity
Interests of the issuers thereof indicated on Schedule II hereto. The
Initial Pledged Debt constitutes all of the outstanding indebtedness
owed to such Grantor by the issuer thereof and is outstanding in the
principal amount indicated on Schedule II hereto.

(e) All filings and other actions (including, without
limitation, actions necessary to obtain control of Collateral as
provided in Section 9-106 of the UCC) necessary to perfect the security
interest in the Collateral of the Grantor created under this Agreement
have been duly made or taken and are in full force and effect, and this
Agreement creates in favor of the Collateral Agent for the benefit of
the Secured Parties a valid and, together with such filings and other
actions, perfected first priority security interest in the Collateral,
securing the payment of the Secured Obligations.

(f) No authorization or approval or other action by, and
no notice to or filing with, any governmental authority or regulatory
body or any other third party is required for (i) the grant by the
Grantor of the security interest granted hereunder or for the
execution, delivery or performance of this Agreement by the Grantor,
(ii) the perfection or maintenance of the security interest created
hereunder (including the first priority

CERC - Pledge Agreement

5

nature of such security interest), except for the filing of financing
and continuation statements under the UCC, which financing statements
have been duly filed and are in full force and effect, and the actions
described in Section 3 with respect to Security Collateral, which
actions have been taken and are in full force and effect, or (iii) the
exercise by the Collateral Agent of its voting or other rights provided
for in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement, except as may be required in connection
with the disposition of any portion of the Security Collateral by laws
affecting the offering and sale of securities generally.

Section 5. Further Assurances. (a) The Grantor agrees
that from time to time, at the expense of the Grantor, the Grantor will promptly
execute and deliver, or otherwise authenticate, all further instruments and
documents, and take all further action that may be necessary or desirable, or
that the Collateral Agent may reasonably request, in order to perfect and
protect any pledge or security interest granted or purported to be granted by
the Grantor hereunder or to enable the Collateral Agent to exercise and enforce
its rights and remedies hereunder with respect to any Collateral of the Grantor.
Without limiting the generality of the foregoing, the Grantor will promptly with
respect to Collateral of the Grantor: (i) if any such Collateral shall be
evidenced by a promissory note or other instrument, deliver and pledge to the
Collateral Agent hereunder such note or instrument duly indorsed and accompanied
by duly executed instruments of transfer or assignment, all in form and
substance satisfactory to the Collateral Agent; (ii) execute or authenticate and
file such financing or continuation statements, or amendments thereto, and such
other instruments or notices, as may be necessary or desirable, or as the
Collateral Agent may request, in order to perfect and preserve the security
interest granted or purported to be granted by the Grantor hereunder; (iii)
deliver and pledge to the Collateral Agent for benefit of the Secured Parties
certificates representing Security Collateral that constitutes certificated
securities, accompanied by undated stock or bond powers executed in blank; (iv)
take all action necessary to ensure that the Collateral Agent has control of
Collateral consisting of investment property as provided in Section 9-106 of the
UCC; and (v) deliver to the Collateral Agent evidence that all other action that
the Collateral Agent may deem reasonably necessary or desirable in order to
perfect and protect the security interest created by the Grantor under this
Agreement has been taken.

(b) The Grantor hereby authorizes the Collateral Agent to
file one or more financing or continuation statements, and amendments thereto,
in each case without the signature of the Grantor, and regardless of whether any
particular asset described in such financing statements falls within the scope
of the UCC or the granting clause of this Agreement. A photocopy or other
reproduction of this Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law. The Grantor ratifies its authorization for the
Collateral Agent to have filed such financing statements, continuation
statements or amendments filed prior to the date hereof.

(c) The Grantor will furnish to the Collateral Agent from
time to time statements and schedules further identifying and describing the
Collateral of the Grantor and such other reports in connection with such
Collateral as the Collateral Agent may reasonably request, all in reasonable
detail.

CERC - Pledge Agreement

6

Section 6. Post-Closing Changes. (a) The Grantor will
not change its name, type of organization, jurisdiction of organization,
organizational identification number or location from those set forth in Section
4(a) of this Agreement without first giving at least 10 Business Days' prior
written notice to the Collateral Agent and taking all action required by the
Collateral Agent for the purpose of perfecting or protecting the security
interest granted by this Agreement. The Grantor will not become bound by a
security agreement authenticated by another Person (determined as provided in
Section 9-203(d) of the UCC) without giving the Collateral Agent 10 Business
Days' prior written notice thereof and taking all action required by the
Collateral Agent to ensure that the perfection and first priority nature of the
Collateral Agent's security interest in the Collateral will be maintained.

(b) The Grantor will hold and preserve its records
relating to the Collateral and will permit up to six representatives of the
Bridge Secured Parties designated by the Required Lenders (as defined in the
Bridge Credit Agreement) or representatives of the Collateral Agent, on not less
than five (5) Business Days' notice, at any reasonable time during normal
business hours, to inspect and make copies of abstracts from such records and
other documents and to discuss general business affairs of the Grantor with its
officers; subject, however, in all cases to the imposition of such conditions as
the Grantor shall deem necessary based on reasonable considerations of safety
and security; provided, however, that the Grantor shall not be required to
disclose to the Collateral Agent or any Secured Party or representatives thereof
any information which is the subject of attorney-client privilege or attorney
work-product privilege properly asserted by the Grantor to prevent the loss of
such privilege in connection with such information or which is prevented from
disclosure pursuant to a confidentiality agreement with third parties.
Notwithstanding the foregoing, none of the conditions as to the exercise of the
right of access described in the preceding sentence that relate to notice
requirements or limitations on the Persons permitted to exercise such right
shall apply at any time when a Default or an Event of Default shall have
occurred (as each such term is defined in either of the Credit Agreements).

(c) If the Grantor does not have an organizational
identification number and later obtains one, it will forthwith notify the
Collateral Agent of such organizational identification number.

Section 7. Voting Rights; Dividends; Etc. (a) So long
as no Event of Default shall have occurred and be continuing:

(i) The Grantor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Security
Collateral or any part thereof for any purpose; provided however, that
the Grantor will not exercise or refrain from exercising any such right
if such action would have a material adverse effect on the value of the
Security Collateral or any part thereof.

(ii) The Grantor shall be entitled to receive and retain
any and all dividends, interest and other distributions paid in respect
of the Security Collateral if and to the extent that the payment
thereof is not otherwise prohibited by the terms of the Loan Documents;
provided, however, that any and all

CERC - Pledge Agreement

7

(A) dividends, interest and other distributions
paid or payable other than in cash in respect of, and
instruments and other property received, receivable or
otherwise distributed in respect of, or in exchange for, any
Security Collateral,

(B) dividends and other distributions paid or
payable in cash in respect of any Security Collateral in
connection with a partial or total liquidation or dissolution
or in connection with a material reduction of capital, capital
surplus or paid-in-surplus and

shall be, and shall be forthwith delivered to the Collateral Agent to
hold as, Security Collateral and shall, if received by the Grantor, be
received in trust for the benefit of the Collateral Agent, be
segregated from the other property or funds of the Grantor and be
forthwith delivered to the Collateral Agent as Security Collateral in
the same form as so received (with any necessary indorsement).

(iii) The Collateral Agent will execute and deliver (or
cause to be executed and delivered) to the Grantor all such proxies and
other instruments as the Grantor may reasonably request for the purpose
of enabling the Grantor to exercise the voting and other rights that it
is entitled to exercise pursuant to paragraph (i) above and to receive
the dividends or interest payments that it is authorized to receive and
retain pursuant to paragraph (ii) above.

(b) Upon the occurrence and during the continuance of an
Event of Default:

(i) All rights of the Grantor (x) to exercise or refrain
from exercising the voting and other consensual rights that it would
otherwise be entitled to exercise pursuant to Section 7(a)(i) shall,
upon notice to the Grantor by the Collateral Agent, cease and (y) to
receive the dividends, interest and other distributions that it would
otherwise be authorized to receive and retain pursuant to Section
7(a)(ii) shall automatically cease, and all such rights shall thereupon
become vested in the Collateral Agent, which shall thereupon have the
sole right to exercise or refrain from exercising such voting and other
consensual rights and to receive and hold as Security Collateral such
dividends, interest and other distributions.

(ii) All dividends, interest and other distributions that
are received by the Grantor contrary to the provisions of paragraph (i)
of this Section 7(b) shall be received in trust for the benefit of the
Collateral Agent, shall be segregated from other funds of the Grantor
and shall be forthwith paid over to the Collateral Agent as Security
Collateral in the same form as so received (with any necessary
indorsement).

Section 8. Transfers and Other Liens; Additional
Shares. (a) The Grantor agrees that it will not (i) sell, assign or otherwise
dispose of, or grant any option with respect to, any of the Collateral, other
than sales, assignments and other dispositions of Collateral, and options
relating to Collateral, permitted under the terms of the Credit Agreements, or
(ii) create

CERC - Pledge Agreement

8

or suffer to exist any Lien upon or with respect to any of the Collateral of the
Grantor except for the pledge, assignment and security interest created under
this Agreement and Permitted Liens.

(b) The Grantor agrees that it will (i) cause each issuer
of the Pledged Equity pledged by the Grantor not to issue any Equity Interests
or other securities in addition to or in substitution for the Pledged Equity
issued by such issuer, except to the Grantor, and (ii) pledge hereunder,
immediately upon its acquisition (directly or indirectly) thereof, any and all
additional Equity Interests or other securities of each issuer of the Pledged
Equity.

Section 9. Collateral Agent Appointed Attorney-in-Fact.
The Grantor hereby irrevocably appoints the Collateral Agent the Grantor's
attorney-in-fact, with full authority in the place and stead of the Grantor and
in the name of the Grantor or otherwise, from time to time, upon the occurrence
and during the continuance of an Event of Default, in the Collateral Agent's
reasonable discretion, to take any action and to execute any instrument that the
Collateral Agent may deem necessary or advisable to accomplish the purposes of
this Agreement, including, without limitation:

(a) to ask for, demand, collect, sue for, recover,
compromise, receive and give acquittance and receipts for moneys due
and to become due under or in respect of any of the Collateral,

(b) to receive, indorse and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a)
above, and

(c) to file any claims or take any action or institute
any proceedings that the Collateral Agent may deem necessary or
desirable for the collection of any of the Collateral or otherwise to
enforce the rights of the Collateral Agent with respect to any of the
Collateral.

Section 10. Collateral Agent May Perform. If the Grantor
fails to perform any agreement contained herein, the Collateral Agent may, but
without any obligation to do so and without notice, itself perform, or cause
performance of, such agreement, and the reasonable expenses of the Collateral
Agent incurred in connection therewith shall be payable by the Grantor under
Section 13.

Section 11. The Collateral Agent's Duties. (a) The
powers conferred on the Collateral Agent hereunder are solely to protect the
Secured Parties' interest in the Collateral and shall not impose any duty upon
it to exercise any such powers. Except for the safe custody of any Collateral in
its possession and the accounting for moneys actually received by it hereunder,
the Collateral Agent shall have no duty as to any Collateral, as to ascertaining
or taking action with respect to calls, conversions, exchanges, maturities,
tenders or other matters relative to any Collateral, whether or not any Secured
Party has or is deemed to have knowledge of such matters, or as to the taking of
any necessary steps to preserve rights against any parties or any other rights
pertaining to any Collateral. The Collateral Agent shall be deemed to have
exercised reasonable care in the custody and preservation of any Collateral in
its possession if such Collateral is accorded treatment substantially equal to
that which it accords its own property.

CERC - Pledge Agreement

9

(b) Anything contained herein to the contrary
notwithstanding, the Collateral Agent may from time to time, when the Collateral
Agent deems it to be necessary with (so long as an Event of Default has not
occurred and is continuing) the written concurrence of the Grantor, appoint one
or more subagents (each a "SUBAGENT") for the Collateral Agent hereunder with
respect to all or any part of the Collateral. In the event that the Collateral
Agent so appoints any Subagent with respect to any Collateral, (i) the
assignment and pledge of such Collateral and the security interest granted in
such Collateral by the Grantor hereunder shall be deemed for purposes of this
Pledge Agreement to have been made to such Subagent, in addition to the
Collateral Agent, for the ratable benefit of the Secured Parties, as security
for the Secured Obligations of the Grantor, (ii) such Subagent shall
automatically be vested, in addition to the Collateral Agent, with all rights,
powers, privileges, interests and remedies of the Collateral Agent hereunder
with respect to such Collateral, and (iii) the term "Collateral Agent," when
used herein in relation to any rights, powers, privileges, interests and
remedies of the Collateral Agent with respect to such Collateral, shall include
such Subagent; provided, however, that no such Subagent shall be authorized to
take any action with respect to any such Collateral unless and except to the
extent expressly authorized in writing by the Collateral Agent.

Section 12. Remedies. If any Event of Default shall have
occurred and be continuing:

(a) The Collateral Agent may exercise in respect of the
Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a
secured party upon default under the UCC (whether or not the UCC
applies to the affected Collateral) and also may: (i) require the
Grantor to, and the Grantor hereby agrees that it will at its expense
and upon request of the Collateral Agent forthwith, assemble all or
part of the Collateral as directed by the Collateral Agent and make it
available to the Collateral Agent at a place and time to be designated
by the Collateral Agent that is reasonably convenient to both parties;
(ii) without notice except as specified below, sell the Collateral or
any part thereof in one or more parcels at public or private sale, at
any of the Collateral Agent's offices or elsewhere, for cash, on credit
or for future delivery, and upon such other terms as the Collateral
Agent may deem commercially reasonable; and (iii) exercise any and all
rights and remedies of any of the Grantor under or in connection with
the Collateral, or otherwise in respect of the Collateral, including,
without limitation, (A) rights of the Grantor to demand or otherwise
require payment of any amount with respect to the Collateral and (B)
exercise all other rights and remedies with respect to the Collateral.
The Grantor agrees that, to the extent notice of sale shall be required
by law, at least ten days' notice to the Grantor of the time and place
of any public sale or the time after which any private sale is to be
made shall constitute reasonable notification. The Collateral Agent
shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Collateral Agent may adjourn any
public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.

(b) Any cash held by or on behalf of the Collateral Agent
and all cash proceeds received by or on behalf of the Collateral Agent
in respect of any sale of, collection from, or other realization upon
all or any part of the Collateral may, in the

CERC - Pledge Agreement

10

discretion of the Collateral Agent, be held by the Collateral Agent as
collateral for, and/or then or at any time thereafter applied (after
payment of any amounts payable to the Collateral Agent pursuant to
Section 13) in whole or in part by the Collateral Agent for the ratable
benefit of the Secured Parties against, all or any part of the Secured
Obligations, in the following manner:

(i) first, paid to the Agents for any amounts
then owing to the Agents pursuant to Section 8.04 of each of
the Credit Agreements or otherwise under the Loan Documents,
ratably in accordance with such respective amounts then owing
to the Agents; and

(ii) second, paid to the Lenders for any amounts
then owing to them, in their capacities as such, under the
Loan Documents ratably in accordance with such respective
amounts then owing to such Lenders.

Any surplus of such cash or cash proceeds held by or on the behalf of
the Collateral Agent and remaining after payment in full of all the
Secured Obligations shall be paid over to the Grantor or to whomsoever
may be lawfully entitled to receive such surplus.

(c) All payments received by the Grantor in respect of
the Collateral shall be received in trust for the benefit of the
Collateral Agent, shall be segregated from other funds of the Grantor
and shall be forthwith paid over to the Collateral Agent in the same
form as so received (with any necessary indorsement).

(d) The Collateral Agent may, without notice to the
Grantor except as required by law and at any time or from time to time,
charge, set-off and otherwise apply all or any part of the Secured
Obligations against any funds held in any deposit account.

Section 13. Indemnity and Expenses. (a) The Grantor
agrees to indemnify, defend and save and hold harmless each Secured Party and
each of their Affiliates and their respective officers, directors, employees,
agents and advisors (each, an "INDEMNIFIED PARTY") from and against, and shall
pay on demand, any and all claims, damages, losses, liabilities and expenses
(including, without limitation, reasonable fees and expenses of counsel) that
may be incurred by or asserted or awarded against any Indemnified Party, in each
case arising out of or in connection with or resulting from this Agreement
(including, without limitation, enforcement of this Agreement), except to the
extent such claim, damage, loss, liability or expense is found in a final,
non-appealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party's gross negligence or willful misconduct.

(b) The Grantor will upon demand pay to the Collateral
Agent the amount of any and all reasonable expenses, including, without
limitation, the reasonable fees and expenses of its counsel and of any experts
and agents, that the Collateral Agent may incur in connection with (i) the
administration of this Agreement, (ii) the custody, preservation, use or
operation of, or the sale of, collection from or other realization upon, any of
the Collateral, (iii) the exercise or enforcement of any of the rights of the
Collateral Agent or the other Secured Parties hereunder or (iv) the failure by
the Grantor to perform or observe any of the provisions hereof.

CERC - Pledge Agreement

11

Section 14. Amendments; Waivers. No amendment or waiver
of any provision of this Agreement, and no consent to any departure by the
Grantor herefrom, shall in any event be effective unless the same shall be in
writing and signed by the Collateral Agent, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No failure on the part of the Collateral Agent or any other
Secured Party to exercise, and no delay in exercising any right hereunder, shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right preclude any other or further exercise thereof or the exercise of any
other right.

Section 15. Notices, Etc. All notices and other
communications provided for hereunder shall be either (i) in writing (including
telegraphic, telecopier or telex communication) and mailed, telegraphed,
telecopied, telexed or otherwise delivered if to the Grantor, at its address at
P.O. Box 2805, Houston, Texas, 77252, Attention: Assistant Treasurer (telecopy:
713 207 3301); if to the Collateral Agent, at its address at Two Penns Way,
Suite 200, New Castle, Delaware, 19720 Attention: Janet Wallace (telecopy: 212
994 0961), with a copy to 388 Greenwich Street, New York, New York, 10013,
Attention: Stuart Glen (telecopy: 212 816 8098) or (ii) by electronic mail (if
electronic mail addresses are designated as provided below) confirmed
immediately in writing, in the case of the Grantor or the Collateral Agent,
addressed to it at its address specified herein and in the Bridge Credit
Agreement; or, as to any party, at such other address as shall be designated by
such party in a written notice to the other parties. All such notices and other
communications shall, when mailed, telegraphed, telecopied, telexed, sent by
electronic mail or otherwise, be effective when deposited in the mails,
delivered to the telegraph company, telecopied, confirmed by telex answerback,
sent by electronic mail and confirmed in writing, or otherwise delivered (or
confirmed by a signed receipt), respectively, addressed as aforesaid; except
that notices and other communications to the Collateral Agent shall not be
effective until received by the Collateral Agent. Delivery by telecopier of an
executed counterpart of any amendment or waiver of any provision of this
Agreement or Schedule hereto shall be effective as delivery of an original
executed counterpart thereof.

Section 16. Continuing Security Interest; Assignments
under the Credit Agreements. This Agreement shall create a continuing security
interest in the Collateral and shall (a) remain in full force and effect until
the later of (i) the payment in full in cash of the Secured Obligations
consisting of Bridge Obligations and (ii) the Termination Date (as defined in
the Bridge Credit Agreement), (b) be binding upon the Grantor, its successors
and assigns and (c) inure, together with the rights and remedies of the
Collateral Agent hereunder, to the benefit of the Secured Parties and their
respective successors, transferees and assigns. Without limiting the generality
of the foregoing clause (c), any Lender may assign or otherwise transfer all or
any portion of its rights and obligations under the applicable Credit Agreement
(including, without limitation, all or any portion of its Commitments, the
Advances owing to it and the Note or Notes, if any, held by it) to any other
Person, and such other Person shall thereupon become vested with all the
benefits in respect thereof granted to such Lender herein or otherwise, in each
case as provided in Section 8.07 of the applicable Credit Agreement.

Section 17. Release; Termination. Upon the later of (i)
the payment in full in cash of the Secured Obligations consisting of Bridge
Obligations, (ii) the release by the Collateral Agent of all Collateral and
(iii) the Termination Date (as defined in the Bridge Credit Agreement), the
pledge and security interest granted hereby shall terminate and all rights to
the

CERC - Pledge Agreement

12

Collateral shall revert to the Grantor. Upon any such termination, the
Collateral Agent will, at the Grantor's expense, execute and deliver to the
Grantor such documents as the Grantor shall reasonably request to evidence such
termination.

Section 18. Execution in Counterparts. This Agreement
may be executed in any number of counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Agreement by telecopier shall be effective as delivery of
an original executed counterpart of this Agreement.

Section 19. Governing Law. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of New
York.

Section 20. Collateral Agent's Direction.
Notwithstanding anything to the contrary contained herein or the Loan Documents,
no enforcement action may be taken by the Collateral Agent without the prior
written direction by the Required Lenders (as defined in the Bridge Credit
Agreement) or the Bridge Agent acting at the direction of the Required Lenders
(as defined in the Bridge Credit Agreement), and the Revolving Lenders shall
have no right to direct the Collateral Agent or vote on any matter other than
the sharing of proceeds hereunder pursuant to Section 12.

IN WITNESS WHEREOF, the Grantor has caused this Agreement to
be duly executed and delivered by its officer thereunto duly authorized as of
the date first above written.

CHANGES IN THE GRANTOR'S NAME (INCLUDING NEW GRANTOR WITH A NEW NAME AND NAMES
ASSOCIATED WITH ALL PREDECESSORS IN INTEREST OF THE GRANTOR)

CHANGES IN THE GRANTOR'S LOCATION

CHANGES IN THE GRANTOR'S CHIEF EXECUTIVE OFFICE

CHANGES IN THE TYPE OF ORGANIZATION

CHANGES IN THE JURISDICTION OF ORGANIZATION

CHANGES IN THE ORGANIZATIONAL IDENTIFICATION NUMBER

CERC - Pledge Agreement

EXHIBIT 99.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350,
CHAPTER 63 OF TITLE 18, UNITED STATES CODE)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the
"Act"), I, David M. McClanahan, President and Chief Executive Officer of
CenterPoint Energy, Inc. (the "Company"), hereby certify, to the best of my
knowledge:

(1) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 (the "Report"), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to
Section 906 of the Act and is not being filed as part of the Report or as a
separate disclosure document.

EXHIBIT 99.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350,
CHAPTER 63 OF TITLE 18, UNITED STATES CODE)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the
"Act"), I, Gary L. Whitlock, Executive Vice President and Chief Financial
Officer of CenterPoint Energy, Inc. (the "Company"), hereby certify, to the best
of my knowledge:

(1) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 (the "Report"), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to
Section 906 of the Act and is not being filed as part of the Report or as a
separate disclosure document.

EXHIBIT 99.3

ITEM 1. BUSINESS

ENVIRONMENTAL MATTERS

GENERAL ENVIRONMENTAL ISSUES

We are subject to numerous federal, state and local requirements relating
to the protection of the environment and the safety and health of personnel and
the public. These requirements relate to a broad range of our activities,
including the discharge of pollutants into air, water, and soil; the proper
handling of solid, hazardous and toxic materials; and waste, noise, and safety
and health standards applicable to the workplace. In order to comply with these
requirements, we will spend substantial amounts from time to time to construct,
modify and retrofit equipment, acquire air emission allowances for operation of
our facilities, and to clean up or decommission disposal or fuel storage areas
and other locations as necessary.

If we do not comply with environmental requirements that apply to our
operations, regulatory agencies could seek to impose on us civil, administrative
and/or criminal liabilities as well as seek to curtail our operations. Under
some statutes, private parties could also seek to impose upon us civil fines or
liabilities for property damage, personal injury and possibly other costs.

Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or CERCLA, owners and operators of facilities from which
there has been a release or threatened release of hazardous substances, together
with those who have transported or arranged for the disposal of those
substances, are liable for:

- the costs of responding to that release or threatened release; and

- the restoration of natural resources damaged by any such release.

We are not aware of any liabilities under CERCLA that would have a material
adverse effect on us, our financial position, results of operations or cash
flows.

AIR EMISSIONS

As part of the 1990 amendments to the Federal Clean Air Act, requirements
and schedules for compliance were developed for attainment of health-based
standards. As part of this process, standards for NOx emissions, a product of
the combustion process associated with power generation and natural gas
compression, are being developed or have been finalized. The Texas Commission on
Environmental Quality standards require reduction of emissions from Texas
Genco's power generating units and some of our natural gas compression
facilities. As of December 31, 2002, Texas Genco had invested $551 million for
NOx emission controls, and it is planning to make expenditures of at least $131
million in the years 2003 through 2005, with possible additional expenditures
after 2005. NOx control estimates for 2006 and 2007 have not been finalized. The
Texas Utility Commission has initially approved Texas Genco's NOx emission
reduction plan in the amount of $699 million as the most cost-effective
alternative in achieving compliance with applicable air quality standards for
these generation facilities. Texas Genco is required to fund NOx reduction
projects for pipelines in East Texas at a cost of $16.2 million, which is
included in the amounts described above.

The Environmental Protection Agency (EPA) has announced its determination
to regulate hazardous air pollutants, including mercury, from coal-fired and
oil-fired steam electric generating units under Section 112 of the Clean Air
Act. The EPA plans to develop Maximum Achievable Control Technology (MACT)
standards for these types of units as well as for turbines, engines and
industrial boilers. The rulemaking for coal and oil-fired steam electric
generating units must be completed by December 2004. Compliance with the rules
will be required within three years thereafter. The MACT standards that will be
applicable to the Texas Genco units cannot be predicted at this time and may
adversely impact Texas Genco's operations. The rulemaking for turbines is
expected to be complete in August 2003, and for engines and industrial boilers
in early February 2004. Based on the rules currently proposed, management does
not anticipate a materially adverse impact in interstate pipeline operations or
Texas Genco's operations.

In 1998, the United States became a signatory to the United Nations
Framework Convention on Climate Change (Kyoto Protocol). The Kyoto Protocol
calls for developed nations to reduce their emissions of greenhouse gases.
Carbon dioxide, which is a major byproduct of the combustion of fossil fuel, is
considered to be a greenhouse gas. In 2002, President Bush withdrew the United
States' support for the Kyoto Protocol. Since this withdrawal, Congress has
explored a number of other alternatives for regulating domestic greenhouse gas
emissions. If the country re-enters and the United States Senate ultimately
ratifies the Kyoto Protocol and/or if the United States Congress adopts other
measures for the control of greenhouse gases, any resulting limitations on power
plant carbon dioxide emissions could have a material adverse impact on all
fossil fuel-fired electric generating facilities, including those belonging to
Texas Genco.

The EPA is conducting a nationwide investigation regarding the historical
compliance of coal-fueled electric generating stations with various permitting
requirements of the Clean Air Act. Specifically, the EPA and the United States
Department of Justice have initiated formal enforcement actions and litigation
against

1

several other utility companies that operate these stations, alleging that these
companies modified their facilities without proper pre-construction permit
authority. To date, Texas Genco has not received requests for information
related to work activities conducted at its facilities. The EPA has not filed an
enforcement action or initiated litigation in connection with Texas Genco
facilities. Nevertheless, any litigation, if pursued successfully by the EPA,
could accelerate the timing of emission reductions currently contemplated for
the facilities and result in the imposition of penalties.

In February 2001, the United States Supreme Court upheld previously adopted
EPA ambient air quality standards for fine particulate matter and ozone. While
attaining these new standards may ultimately require expenditures for air
quality control system upgrades for our facilities, regulations establishing
required controls are not expected until after 2005. Consequently, it is not
possible to determine the impact on our operations at this time.

In July 2002, the White House sent to Congress a bill proposing the Clear
Skies Act of 2002. The Act is designed to achieve long-term reductions of
multiple pollutants produced from fossil fuel-fired power plants. The Act
targets reductions averaging 70% for sulfur dioxide, NOx and mercury emissions.
If approved by the United States Congress, the Act would create a gradually
imposed market-based compliance program that would come into effect initially in
2008 with full compliance required by 2018. Fossil fuel-fired power plants owned
by companies like Texas Genco would be affected by the adoption of this program,
or other legislation currently pending in the United States Congress addressing
similar issues. To comply with such programs, Texas Genco and other regulated
entities could pursue a variety of strategies including the installation of
pollution controls, the purchase of emission allowances or the curtailment of
operations.

WATER ISSUES

In July 2000, the EPA issued final rules for the implementation of the
total maximum daily load (TMDL) program. The goal of the TMDL program is to
restore waters designated as impaired by identifying and restricting the loading
of pollutants contributing to the impairment. While we are not aware of any of
our facilities being directly affected by the current TMDL developments, there
is the potential that the establishment of TMDLs may eventually result in more
stringent discharge limits in our plant discharge permits. Such limits could
require our facilities to install additional water treatment facilities or
equipment, modify operational practices or implement other water quality
improvement measures. In October 2001, the EPA signed a final rule delaying the
effective date of the TMDL rule until April 30, 2003. In December 2002, the EPA
published a proposed rulemaking that would withdraw the July 2000 rule.

In April 2002, the EPA proposed rules under Section 316(b) of the Clean
Water Act relating to the design and operation of cooling water intake
structures. This proposal is the second of three current phases of rulemaking
dealing with Section 316(b) and generally would affect existing facilities that
use significant quantities of cooling water. Under the amended court deadline,
the EPA is to issue final rules for these Phase II facilities by February 2004.
While the requirements of the final rule cannot be predicted at this time,
significant capital expenditures by Texas Genco could be required. We anticipate
that substantial comments and, if necessary, litigation will be filed by
affected parties to attempt to achieve an acceptable final regulation.

The EPA and the State of Texas periodically update water quality standards
in response to new toxicological data and the development of enhanced analytical
techniques that allow lower detection levels. The lowering of water quality
criteria for parameters such as arsenic, mercury and selenium could affect
generating facility discharge limitations and require our facilities to install
additional treatment equipment.

LIABILITY FOR PREEXISTING CONDITIONS AND REMEDIATION

Asbestos and Other. As a result of their age, many of our facilities
contain significant amounts of asbestos insulation, other asbestos-containing
materials and lead-based paint. Existing state and federal rules require the
proper management and disposal of these potentially toxic materials. We have
developed a management plan that includes proper maintenance of existing
non-friable asbestos installations, and removal and abatement of asbestos
containing materials where necessary because of maintenance, repairs,
replacement

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or damage to the asbestos itself. We have planned for the proper management,
abatement and disposal of asbestos and lead-based paint at our facilities.

We have been named, along with numerous others, as a defendant in a number
of lawsuits filed by a large number of individuals who claim injury due to
exposure to asbestos while working at sites along the Texas Gulf Coast. Most of
these claimants have been third party workers who participated in construction
of various industrial facilities, including power plants, and some of the
claimants have worked at locations owned by us. We anticipate that additional
claims like those received may be asserted in the future, and we intend to
continue our practice of vigorously contesting claims that we do not consider to
have merit. Although their ultimate outcome cannot be predicted at this time, we
do not believe, based on our experience to date, that these matters, either
individually or in the aggregate, will have a material adverse effect on our
financial position, results of operations or cash flows.

Manufactured Gas Plant Sites. CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in CERC's Minnesota service territory, two of which
CERC believes it neither owned or operated, and for which CERC believes it has
no liability.

At December 31, 2002, CERC had accrued $19 million for remediation of the
Minnesota sites. At December 31, 2002, the estimated range of possible
remediation costs was $8 million to $44 million based on remediation continuing
for 30 to 50 years. The cost estimates are based on studies of a site or
industry average costs for remediation of sites of similar size. The actual
remediation costs will be dependent upon the number of sites to be remediated,
the participation of other potentially responsible parties (PRP), if any, and
the remediation methods used. CERC has an environmental expense tracker
mechanism in its rates in Minnesota. CERC has collected $12 million at December
31, 2002 to be used for future environmental remediation.

CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for other sites. Based on
current information, the Company has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.

Hydrocarbon Contamination. In August 2001, a number of Louisiana residents
who live near the Wilcox Aquifer filed suit in the 1st Judicial District Court,
Caddo Parish, Louisiana against CERC and others. The suit alleges that CERC and
the other defendants allowed or caused hydrocarbon or chemical contamination of
the Wilcox Aquifer, which lies beneath property owned or leased by the
defendants and is the sole or primary drinking water aquifer in the area. The
monetary damages sought are unspecified. In April 2002, a separate suit with
identical allegations against the same parties was filed in the same court.
Additionally, in January 2003, a third suit with similar allegations was filed
against the same parties in the 26th Judicial District Court, Bossier Parish,
Louisiana.

Mercury Contamination. Like similar companies, our pipeline and natural
gas distribution operations have in the past employed elemental mercury in
measuring and regulating equipment. It is possible that small amounts of mercury
may have been spilled in the course of normal maintenance and replacement
operations and that these spills may have contaminated the immediate area around
the meters with elemental mercury. We have found this type of contamination in
the past, and we have conducted remediation at sites found to be contaminated.
Although we are not aware of additional specific sites, it is possible that
other contaminated sites may exist and that remediation costs may be incurred
for these sites. Although the total amount of these costs cannot be known at
this time, based on our experience and that of others in the natural gas
industry to date and on the current regulations regarding remediation of these
sites, we believe that the cost of any remediation of these sites will not be
material to our financial position, results of operations or cash flows.

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RISK FACTORS

RISK FACTORS ASSOCIATED WITH FINANCIAL CONDITION AND OTHER RISKS

IF WE ARE UNABLE TO ARRANGE FUTURE FINANCINGS ON ACCEPTABLE TERMS, OUR ABILITY
TO FUND FUTURE CAPITAL EXPENDITURES AND REFINANCE EXISTING INDEBTEDNESS COULD
BE LIMITED.

As a result of several events occurring in 2001 and 2002, including the
September 11, 2001 terrorist attacks, the bankruptcy of Enron Corp., the
downgrading of our credit ratings and the credit ratings of several energy
companies, the general downturn in the utility industry and the unusual
volatility in the U.S. financial markets, the availability and cost of capital
for our business have been adversely affected. If we are unable to obtain
external financing to meet our future capital requirements on terms that are
acceptable to us, our financial condition and future results of operations could
be materially adversely affected. As of December 31, 2002, we had $11.1 billion
of outstanding indebtedness and trust preferred securities, including $1.0
billion of debt that must be refinanced in 2003, after giving effect to the
amendment and extension of our $3.85 billion credit facility in February 2003.
In addition, the capital constraints currently impacting our businesses may
require our future indebtedness to include terms that are more restrictive or
burdensome than those of our current indebtedness. These terms may negatively
impact our ability to operate our business or severely restrict or prohibit
distributions from our subsidiaries. The success of our future financing efforts
may depend, at least in part, on:

As of December 31, 2002, our CenterPoint Houston subsidiary had $1.8
billion of general mortgage bonds outstanding. It may issue additional general
mortgage bonds on the basis of retired bonds, 70% of property additions or cash
deposited with the trustee. Although approximately $900 million of additional
general mortgage bonds could be issued on the basis of property additions as of
December 31, 2002, CenterPoint Houston has agreed contractually to limit
incremental secured debt to $300 million. In addition, we are contractually
prohibited, subject to certain exceptions, from issuing additional first
mortgage bonds.

Our current credit ratings are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Future Sources and Uses of Cash -- Impact on Liquidity of a
Downgrade in Credit Ratings" in Item 7 of this report. We cannot assure you that
these credit ratings will remain in effect for any given period of time or that
one or more of these ratings will not be lowered or withdrawn entirely by a
rating agency. We note that these credit ratings are not recommendations to buy,
sell or hold our securities. Each rating should be evaluated independently of
any other rating. Any future reduction or withdrawal of one or more of our
credit ratings could have a material adverse impact on our ability to access
capital on acceptable terms.

CENTERPOINT HOUSTON MAY NOT BE SUCCESSFUL IN RECOVERING THE FULL VALUE OF ITS

STRANDED COSTS AND REGULATORY ASSETS RELATED TO GENERATION.

CenterPoint Houston is entitled to recover its stranded costs (the excess
of regulatory net book value of generation assets, as defined by the Texas
electric restructuring law, over the market value of those assets) and its
regulatory assets related to generation. CenterPoint Houston expects to make a
filing in January 2004 in a true-up proceeding provided for by the Texas
electric restructuring law. The purpose of this proceeding will be to quantify
and reconcile:

- the amount of stranded costs;

- differences in the prices achieved in the state mandated auctions of
Texas Genco's generation capacity and Texas Utility Commission estimates;

- fuel over- or under-recovery;

- the "price to beat" clawback; and

- other regulatory assets associated with our generation business that were
not previously recovered through the issuance of securitization bonds by
a subsidiary.

CenterPoint Houston will be required to establish and support the amounts
of these costs in order to recover them. CenterPoint Houston expects these costs
to be substantial. We cannot assure you that CenterPoint Houston will be able to
successfully establish and support its estimates of the value of these costs.
For more information about the true-up proceeding, please read "Our Business --
Electric Transmission & Distribution -- Stranded Costs and Regulatory Assets
Recovery" above and Note 4(a) to our consolidated financial statements.

In addition, CenterPoint Houston's $1.3 billion collateralized term loan
matures on November 11, 2005 and is expected to be repaid or refinanced with the
proceeds from the recovery of these costs. To the extent CenterPoint Houston has
not received the proceeds by November 11, 2005, CenterPoint Houston's ability to
repay or refinance its $1.3 billion term loan will be adversely affected.

CENTERPOINT HOUSTON'S RECEIVABLES ARE CONCENTRATED IN A SMALL NUMBER OF RETAIL

ELECTRIC PROVIDERS.

CenterPoint Houston's receivables from the distribution of electricity are
collected from retail electric providers that supply the electricity CenterPoint
Houston distributes to their customers. Currently, CenterPoint Houston does
business with approximately 31 retail electric providers. Adverse economic
conditions, structural problems in the new ERCOT market or financial
difficulties of one or more retail electric providers could impair the ability
of these retail providers to pay for CenterPoint Houston's services or could
cause them to delay such payments. CenterPoint Houston depends on these retail
electric providers to remit payments timely to it. Any delay or default in
payment could adversely affect CenterPoint Houston's cash flows, financial
condition and results of operations. CenterPoint Houston's receivables balance
from retail electric providers at December 31, 2002 was $85 million.
Approximately 72% of CenterPoint Houston's receivables from retail electric
providers at December 31, 2002 was owed by subsidiaries of Reliant Resources.
Our financial condition may be adversely affected if Reliant Resources is unable
to meet its obligations to CenterPoint Houston.

Reliant Resources, through its subsidiaries, is CenterPoint Houston's
largest customer. Pursuant to the Texas electric restructuring law, Reliant
Resources may be obligated to make a large "price to beat" clawback payment to
CenterPoint Houston in 2004. CenterPoint Houston expects the clawback, if any,
to be applied against any stranded cost recovery to which CenterPoint Houston is
entitled or, if no stranded costs are recoverable, to be refunded to retail
electric providers. Also, as discussed in "Risk Factors Associated with
Financial Condition and Other Risks," Reliant Resources is obligated to
indemnify CenterPoint Houston for other potential liabilities. Reliant Resources
has reported that it is facing large maturities of its debt over the next year
and thus its ability to satisfy its obligations to CenterPoint Houston cannot be
assured.

RATE REGULATION OF CENTERPOINT HOUSTON'S BUSINESS MAY DELAY OR DENY CENTERPOINT

HOUSTON'S FULL RECOVERY OF ITS COSTS.

CenterPoint Houston's rates are regulated by certain municipalities and the
Texas Utility Commission based on an analysis of its invested capital and its
expenses incurred in a test year. Thus, the rates CenterPoint Houston is allowed
to charge may not match its expenses at any given time. While rate regulation in
Texas is premised on providing a reasonable opportunity to recover reasonable
and necessary operating expenses and to earn a reasonable return on its invested
capital, there can be no assurance that the Texas Utility Commission will judge
all of CenterPoint Houston's costs to be reasonable or necessary or that the
regulatory process in which rates are determined will always result in rates
that will produce full recovery of CenterPoint Houston's costs.

5

CENTERPOINT HOUSTON IS OPERATING IN A RELATIVELY NEW MARKET ENVIRONMENT IN

WHICH IT AND OTHERS HAVE LITTLE OPERATING EXPERIENCE.

The competitive electric market in Texas became fully operational in
January 2002. Neither CenterPoint Houston nor any of the Texas Utility
Commission, ERCOT or other market participants has any significant operating
history under the market framework created by the Texas electric restructuring
law. Some operational difficulties were encountered in the pilot program
conducted in 2001 and continue to be experienced now. These difficulties include
delays in the switching of some customers from one retail electric provider to
another. These difficulties create uncertainty as to the amount of transmission
and distribution charges owed by each retail electric provider, which may cause
payment of those amounts to be delayed. While to date these difficulties have
not been material, these operating difficulties could become material or
structural changes adopted to address these difficulties could materially
adversely affect its results of operations, financial condition and cash flows.

DISRUPTIONS AT POWER GENERATION FACILITIES OWNED BY THIRD PARTIES COULD
INTERRUPT CENTERPOINT HOUSTON'S SALES OF TRANSMISSION AND DISTRIBUTION
SERVICES.

CenterPoint Houston depends on power generation facilities owned by third
parties to provide retail electric providers with electric power which it
transmits and distributes to their customers. CenterPoint Houston does not own
or operate any power generation facilities. If power generation is disrupted or
if power generation capacity is inadequate, CenterPoint Houston's transmission
and distribution services may be interrupted, and its results of operations,
financial condition and cash flows may be adversely affected.

CENTERPOINT HOUSTON'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

A portion of CenterPoint Houston's revenues is derived from rates that it
collects from each retail electric provider based on the amount of electricity
it distributes on behalf of each retail electric provider. Thus, CenterPoint
Houston's revenues and results of operations are subject to seasonality, weather
conditions and other changes in electricity usage, with revenues being higher
during the warmer months.

TECHNOLOGICAL CHANGE MAY MAKE ALTERNATIVE ENERGY SOURCES MORE ATTRACTIVE AND

MAY ADVERSELY AFFECT CENTERPOINT HOUSTON'S REVENUES AND RESULTS OF OPERATIONS.

The continuous process of technological development may result in the
introduction to retail customers of economically attractive alternatives to
purchasing electricity through CenterPoint Houston's distribution facilities.
Manufacturers of self-generation facilities continue to develop smaller-scale,
more-fuel-efficient generating units that can be cost-effective options for some
retail customers with smaller electric energy requirements. Any reduction in the
amount of electric energy CenterPoint Houston distributes as a result of these
technologies may have an adverse impact on its results of operations, financial
condition and cash flows in the future.

RISK FACTORS AFFECTING THE RESULTS OF OUR ELECTRIC GENERATION BUSINESS

TEXAS GENCO'S REVENUES AND RESULTS OF OPERATIONS ARE IMPACTED BY MARKET RISKS

THAT ARE BEYOND ITS CONTROL.

Texas Genco sells electric generation capacity, energy and ancillary
services in the ERCOT market. The ERCOT market consists of the majority of the
population centers in the State of Texas and represents approximately 85% of the
demand for power in the state. Under the Texas electric restructuring law, Texas
Genco and other power generators in Texas are not subject to traditional
cost-based regulation and, therefore, may sell electric generation capacity,
energy and ancillary services to wholesale purchasers at prices determined by
the market. As a result, Texas Genco is not guaranteed any rate of return on its
capital investments through mandated rates, and its revenues and results of
operations depend, in large part, upon prevailing market prices for electricity
in the ERCOT market. Market prices for electricity, generation capacity, energy
and ancillary services may fluctuate substantially. Texas Genco's gross margins
are primarily derived from the sale of capacity entitlements associated with its
large, solid fuel base-load generating units, including its Limestone and W. A.
Parish facilities and its interest in the South Texas Project. The gross margins
generated from payments associated with the capacity of these units are directly
impacted by natural gas prices. Since the fuel costs for Texas Genco's base-load
units are largely fixed under long-term contracts, they are generally not
subject to significant daily and monthly fluctuations. However, the market price
for power in the ERCOT market is directly affected by the price of natural gas.
Because natural gas is the marginal fuel for facilities serving the ERCOT market
during most hours, its price has a significant influence on the price of
electric power. As a result, the price customers are willing to pay for
entitlements to Texas Genco's solid fuel-fired base-load capacity generally
rises and falls with natural gas prices.

6

Market prices in the ERCOT market may also fluctuate substantially due to
other factors. Such fluctuations may occur over relatively short periods of
time. Volatility in market prices may result from:

- oversupply or undersupply of generation capacity;

- power transmission or fuel transportation constraints or inefficiencies;

- federal and state energy and environmental regulation and legislation.

THERE IS CURRENTLY A SURPLUS OF GENERATING CAPACITY IN THE ERCOT MARKET AND WE

EXPECT THE MARKET FOR WHOLESALE POWER TO BE HIGHLY COMPETITIVE.

The amount by which power generating capacity exceeded peak demand (reserve
margin) in the ERCOT market has exceeded 20% since 2001, and the Texas Utility
Commission and the ERCOT ISO have forecasted the reserve margin for 2003 to
continue to exceed 20%. A market consulting firm specializing in the power
industry has published a report that predicts there will be a surplus of
generating capacity in the ERCOT market for the next several years. The
commencement of commercial operation of new facilities in the ERCOT region will
increase the competitiveness of the wholesale power market, which could have a
material adverse effect on Texas Genco's results of operations, financial
condition, cash flows and the market value of Texas Genco's assets.

Texas Genco's competitors include generation companies affiliated with
Texas-based utilities, independent power producers, municipal and co-operative
generators and wholesale power marketers. The unbundling of vertically
integrated utilities into separate generation, transmission and distribution and
retail businesses pursuant to the Texas electric restructuring law could result
in a significant number of additional competitors participating in the ERCOT
market. Some of Texas Genco's competitors may have greater financial resources,
lower cost structures, more effective risk management policies and procedures,
greater ability to incur losses, greater potential for profitability from
ancillary services, and greater flexibility in the timing of their sale of
generating capacity and ancillary services than Texas Genco does.

TEXAS GENCO IS SUBJECT TO OPERATIONAL AND MARKET RISKS ASSOCIATED WITH ITS

CAPACITY AUCTIONS.

Texas Genco is obligated to sell substantially all of its capacity and
related ancillary services through 2003 pursuant to the capacity auctions more
fully described under "Our Business -- Electric Generation" above. In these
auctions, Texas Genco sells firm entitlements on a forward basis to capacity and
ancillary services dispatched within specified operational constraints. Although
Texas Genco has reserved a portion of its aggregate net generation capacity from
its capacity auctions for planned or forced outages at its facilities,
unanticipated plant outages or other problems with its generation facilities
could result in its firm capacity and ancillary services commitments exceeding
its available generation capacity. As a result, Texas Genco could be required to
obtain replacement power from third parties in the open market to satisfy its
firm commitments that could result in significant additional costs. In addition,
an unexpected outage at one of Texas Genco's

7

lower cost facilities could require it to run one of its higher cost plants in
order to satisfy its obligations even though the energy payments for the
dispatched power are based on the cost at the lower-cost facility.

Texas Genco sells capacity entitlements in state mandated auctions and in
its other contractually mandated auctions. The mechanics, regulations and
agreements governing Texas Genco's capacity auctions are complex, and the
auction process in which Texas Genco sells entitlements to its capacity is
relatively new. The state mandated auctions require, among other things, Texas
Genco's capacity entitlements to be sold in pre-determined amounts. The
characteristics of the capacity entitlements Texas Genco sells in state mandated
auctions are defined by rules adopted by the Texas Utility Commission and,
therefore, cannot be changed to respond to market demands or operational
requirements without approval by the Texas Utility Commission.

IF THE ERCOT MARKET DOES NOT FUNCTION IN THE MANNER CONTEMPLATED BY THE TEXAS
ELECTRIC RESTRUCTURING LAW, TEXAS GENCO'S BUSINESS PROSPECTS, RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS COULD BE ADVERSELY IMPACTED.

The initiatives under the Texas electric restructuring law have had a
significant impact on the nature of the electric power industry in Texas and the
manner in which participants in the ERCOT market conduct their business. These
changes are ongoing, and we cannot predict the future development of the ERCOT
market or the ultimate effect that this changing regulatory environment will
have on Texas Genco's business. Some restructured markets in other states have
recently experienced supply problems and extreme price volatility. If the ERCOT
market does not function as planned once the deregulation initiatives called for
by the Texas electric restructuring law have taken their full effect, Texas
Genco's results of operations, financial condition and cash flows could be
adversely affected. In addition, any market failures could lead to revisions or
reinterpretations of the Texas electric restructuring law, the adoption of new
laws and regulations applicable to Texas Genco or its facilities and other
future changes in laws and regulations that may have a detrimental effect on
Texas Genco's business.

As part of the transition to retail competition in Texas, the ERCOT market
has changed from operating with multiple control areas, each managed by one of
the utilities in the state, to a single control area managed by the ERCOT ISO.
The ERCOT ISO is responsible for maintaining reliable operations of the bulk
electric power supply system in the new combined control area. If the ERCOT ISO
is unable to successfully manage these functions, the ERCOT market may not
operate properly and Texas Genco's results of operations could be adversely
affected. In addition, the ERCOT ISO may impose or the Texas Utility Commission
may require price limitations, bidding rules and other mechanisms that could
impact wholesale prices in the ERCOT market and the outcomes of Texas Genco's
capacity auctions.

THE OPERATION OF TEXAS GENCO'S POWER GENERATION FACILITIES INVOLVES RISKS THAT
COULD ADVERSELY AFFECT ITS REVENUES, COSTS, RESULTS OF OPERATIONS, FINANCIAL
CONDITION AND CASH FLOWS.

Texas Genco is subject to various risks associated with operating its power
generation facilities, any of which could adversely affect its revenues, costs,
results of operations, financial condition and cash flows. These risks include:

- limitations that may be imposed by regulatory requirements, including,
among others, environmental standards;

- limitations imposed by the ERCOT ISO;

8

- violations of permit limitations;

- operator error; and

- catastrophic events such as fires, hurricanes, explosions, floods,
terrorist attacks or other similar occurrences.

A significant portion of Texas Genco's facilities were constructed many
years ago. Older generation equipment, even if maintained in accordance with
good engineering practices, may require significant capital expenditures to keep
it operating at high efficiency and to meet regulatory requirements. This
equipment is also likely to require periodic upgrading and improvement. Any
unexpected failure to produce power, including failure caused by breakdown or
forced outage, could result in reduced earnings.

Texas Genco employs experienced personnel to maintain and operate its
facilities and carries insurance to mitigate the effects of some of the
operating risks described above. Texas Genco's insurance policies, however, are
subject to certain limits and deductibles and do not include business
interruption coverage. Should one or more of the events described above occur,
revenues from Texas Genco's operations may be significantly reduced or its costs
of operations may significantly increase.

TEXAS GENCO RELIES ON POWER TRANSMISSION FACILITIES THAT IT DOES NOT OWN OR
CONTROL AND THAT ARE SUBJECT TO TRANSMISSION CONSTRAINTS WITHIN THE ERCOT
MARKET. IF THESE FACILITIES FAIL TO PROVIDE TEXAS GENCO WITH ADEQUATE
TRANSMISSION CAPACITY, IT MAY NOT BE ABLE TO DELIVER WHOLESALE ELECTRIC POWER
TO ITS CUSTOMERS AND IT MAY INCUR ADDITIONAL COSTS.

Texas Genco depends on transmission and distribution facilities owned and
operated by our wholly owned subsidiary, CenterPoint Houston, and on
transmission and distribution systems owned by others to deliver the wholesale
electric power it sells from its power generation facilities to its customers,
who in turn deliver power to the end users. If transmission is disrupted, or if
transmission capacity infrastructure is inadequate, Texas Genco's ability to
sell and deliver wholesale electric energy may be adversely impacted.

The single control area of the ERCOT market is currently organized into
four congestion zones, referred to as the North, South, West and Houston zones.
These congestion zones are determined by physical constraints on the ERCOT
transmission system that make it difficult or impossible at times to move power
from a zone on one side of the constraint to the zone on the other side of the
constraint. All but two of Texas Genco's facilities are located in the Houston
congestion zone. Texas Genco's Limestone facility is located in the North
congestion zone and the South Texas Project is located in the South congestion
zone. Texas Genco sells a portion of the entitlements offered in its state
mandated auctions to customers located in congestion zones other than the
Houston zone. Transmission congestion between these zones could impair Texas
Genco's ability to schedule power for transmission across zonal boundaries,
which are defined by the ERCOT ISO, thereby inhibiting its efforts to match its
facility scheduled outputs with its customer scheduled requirements.

The ERCOT ISO has instituted rules that directly assign congestion costs to
the parties causing the congestion. Therefore, power generators participating in
the ERCOT market could be liable for the congestion costs associated with
transferring power between zones. Texas Genco schedules its anticipated
requirements based on its own forecasted needs, which rely in part on demand
forecasts made by its customers. These forecasts may prove to be inaccurate.
Texas Genco could be deemed responsible for congestion costs if it schedules
delivery of power between congestion zones during times when the ERCOT ISO
expects congestion to occur between the zones. If Texas Genco is liable for
congestion costs, its financial results could be adversely affected. For more
information about the ERCOT market, please read "Our
Business -- Overview -- ERCOT Market Framework" above.

Texas Genco relies primarily on natural gas, coal, lignite and uranium to
fuel its generation facilities. Texas Genco purchases its fuel from a number of
different suppliers under long-term contracts and on the spot market. Under
Texas Genco's capacity auctions, it sells firm entitlements to capacity and
ancillary services.

9

Therefore, any disruption in the delivery of fuel could prevent Texas Genco from
operating its facilities to meet its auction commitments, which could adversely
affect its results of operations, financial condition and cash flows.

Delivery of natural gas to each of Texas Genco's natural gas-fired
facilities typically depends on the natural gas pipelines or distributors for
that location. As a result, Texas Genco is subject to the risk that a natural
gas pipeline or distributor may suffer disruptions or curtailments in its
ability to deliver natural gas to it or that the amounts of natural gas Texas
Genco requests are curtailed. These disruptions or curtailments could adversely
affect Texas Genco's ability to operate its natural gas-fired generating
facilities. Texas Genco leases gas storage facilities capable of storing
approximately 6.3 billion cubic feet of natural gas, of which 4.2 billion cubic
feet is working capacity.

Texas Genco purchases coal from a limited number of suppliers. Generally,
Texas Genco seeks to maintain average coal reserves sufficient to operate its
coal-fired facilities for 30 days. Texas Genco also has long-term rail
transportation contracts with two rail transportation companies to transport
coal to its coal-fired facilities. Any extended disruption in Texas Genco's coal
supply, including those caused by transportation disruptions, adverse weather
conditions, labor relations or environmental regulations affecting Texas Genco's
coal suppliers, could adversely affect its ability to operate its coal-fired
facilities. Texas Genco is also exposed to the risk that suppliers that have
agreed to provide it with fuel could breach their obligations. Should these
suppliers fail to perform, Texas Genco may be forced to enter into alternative
arrangements at then-current market prices. As a result, Texas Genco's results
of operations, financial condition and cash flows could be adversely affected.

TO DATE, TEXAS GENCO HAS SOLD A SUBSTANTIAL PORTION OF ITS AUCTIONED CAPACITY
ENTITLEMENTS TO A SINGLE CUSTOMER, RELIANT RESOURCES. ACCORDINGLY, TEXAS
GENCO'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS COULD BE
ADVERSELY AFFECTED IF RELIANT RESOURCES DECLINED TO PARTICIPATE IN TEXAS
GENCO'S FUTURE AUCTIONS OR FAILED TO MAKE PAYMENTS WHEN DUE UNDER RELIANT
RESOURCES' PURCHASED ENTITLEMENTS.

By participating in Texas Genco's contractually mandated auctions,
subsidiaries of Reliant Resources purchased entitlements to 63% of the aggregate
2002 capacity and 58% of the aggregate 2003 capacity that Texas Genco has sold
to date through its capacity auctions. Reliant Resources made these purchases
either through the exercise of its contractual rights to purchase 50% of the
entitlements Texas Genco auctions in its contractually mandated auctions or
through the submission of bids. In the event Reliant Resources declined to
participate in Texas Genco's future auctions or failed to make payments when
due, Texas Genco's results of operations, financial condition and cash flows
could be adversely affected. In this regard, Reliant Resources has reported that
it is facing large maturities of debt over the next year, and its securities
ratings are now below investment grade.

TEXAS GENCO MAY INCUR SUBSTANTIAL COSTS AND LIABILITIES AS A RESULT OF ITS

OWNERSHIP OF NUCLEAR FACILITIES.

Texas Genco owns a 30.8% interest in the South Texas Project, a nuclear
powered generation facility. As a result, Texas Genco is subject to risks
associated with the ownership and operation of nuclear facilities. These risks
include:

- the potential harmful effects on the environment and human health
resulting from the operation of nuclear facilities and the storage,
handling and disposal of radioactive materials;

- limitations on the amounts and types of insurance commercially available
to cover losses that might arise in connection with nuclear operations;
and

- uncertainties with respect to the technological and financial aspects of
decommissioning nuclear plants at the end of their licensed lives.

The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of non-compliance, the NRC has the authority to impose fines, shut
down a unit, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved. Revised safety requirements promulgated
by the NRC could necessitate substantial

10

capital expenditures at nuclear plants. In addition, although we have no reason
to anticipate a serious nuclear incident at the South Texas Project, if an
incident did occur, it could have a material adverse effect on Texas Genco's
results of operations, financial condition and cash flows.

CONTRACTUAL RESTRICTIONS ON THE OPERATION OF TEXAS GENCO'S BUSINESS MAY LIMIT
ITS ABILITY TO TAKE ACTIONS AVAILABLE TO OTHER COMPANIES THAT ARE NOT SUBJECT
TO SIMILAR RESTRICTIONS.

Effective December 31, 2000, Reliant Resources and Reliant Energy entered
into a master separation agreement, that now governs the rights and obligations
of us and Reliant Resources in connection with the business separation plan of
Reliant Energy adopted in response to the Texas electric restructuring law.
Reliant Resources also has an option to purchase the shares of Texas Genco stock
owned by us that is exercisable in January 2004. Texas Genco has agreed to
comply with certain restrictions governing its operations as contemplated by the
master separation agreement and option agreement. These restrictions limit Texas
Genco's ability to:

- merge or consolidate with another entity;

- sell assets;

- enter into long-term agreements and commitments for the purchase of fuel
or the purchase or sale of power outside the ordinary course of business;

TEXAS GENCO MAY NOT HAVE ACCESS TO SUFFICIENT CAPITAL IN THE AMOUNTS AND AT

THE TIMES NEEDED TO FINANCE ITS BUSINESS.

To date, Texas Genco's capital has been provided by internally generated
cash flows and borrowings and capital contributions from CenterPoint Energy. We
can give no assurances that Texas Genco's current and future capital structure,
operating performance, financial condition and cash flows will permit it to
access the capital markets or to obtain other financing as needed to meet its
working capital requirements and projected future capital expenditures on
favorable terms. Texas Genco's projected future capital expenditures are
substantial. Texas Genco's ability to secure third party credit lines or other
debt financing may be adversely impacted by the factors described in this
section, including the nature of its business, which may lead to volatility in
its financial results and cash flows. CenterPoint Energy has agreed to lend
funds to Texas Genco from time to time upon Texas Genco's request until the
earlier of the closing date on which Reliant Resources acquires Texas Genco
common stock from CenterPoint Energy pursuant to the Reliant Resources option or
the expiration of the Reliant Resources option. In the event CenterPoint Energy
were to experience liquidity problems or otherwise failed to perform, Texas
Genco may be unable to obtain third party financing.

In addition, Texas Genco's ability to raise capital is restricted under its
agreements with CenterPoint Energy. These restrictions limit Texas Genco's
ability to:

- issue additional equity securities;

- encumber its assets; or

11

- incur indebtedness, except to satisfy requirements for operating and
maintenance expenditures and other capital expenditures contemplated
under its agreements with CenterPoint Energy, to meet its working capital
needs, or to refinance indebtedness incurred for the foregoing purposes.

In connection with CenterPoint Energy's registration as a public utility
holding company under the 1935 Act, the SEC has limited the aggregate amount of
Texas Genco's external borrowings to $500 million. In addition, the order issued
to CenterPoint Energy under the 1935 Act restricts Texas Genco's ability to pay
dividends out of capital accounts. Under these restrictions, Texas Genco is
permitted to pay dividends out of its current or retained earnings, and it may
also pay dividends in an amount of up to $100 million in excess of its current
or retained earnings.

TEXAS GENCO'S OPERATIONS ARE SUBJECT TO EXTENSIVE REGULATION. IF TEXAS GENCO
FAILS TO COMPLY WITH APPLICABLE REGULATIONS OR OBTAIN OR MAINTAIN ANY
NECESSARY GOVERNMENTAL PERMIT OR APPROVAL, IT MAY BE SUBJECT TO CIVIL,
ADMINISTRATIVE AND/OR CRIMINAL PENALTIES THAT COULD ADVERSELY IMPACT ITS
RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS.

Texas Genco's operations are subject to complex and stringent energy,
environmental and other governmental laws and regulations. The acquisition,
ownership and operation of power generation facilities require numerous permits,
approvals and certificates from federal, state and local governmental agencies.
These facilities are subject to regulation by the Texas Utility Commission
regarding non-rate matters. Existing regulations may be revised or
reinterpreted, new laws and regulations may be adopted or become applicable to
Texas Genco or any of its generation facilities or future changes in laws and
regulations may have a detrimental effect on its business.

Operation of the South Texas Project is subject to regulation by the NRC.
This regulation involves testing, evaluation and modification of all aspects of
plant operation in light of NRC safety and environmental requirements.
Continuous demonstrations to the NRC that plant operations meet applicable
requirements are also required. The NRC has the ultimate authority to determine
whether any nuclear powered generating unit may operate.

Water for certain of Texas Genco's facilities is obtained from public water
authorities. New or revised interpretations of existing agreements by those
authorities or changes in price or availability of water may have a detrimental
effect on Texas Genco's business.

If Texas Genco fails to comply with regulatory requirements that apply to
its operations, regulatory agencies could seek to impose civil, administrative
and/or criminal liabilities or could take other actions seeking to curtail its
operations. These liabilities or actions could adversely impact its results of
operations, financial condition and cash flows.

TEXAS GENCO'S COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS ARE SIGNIFICANT AND
THE COST OF COMPLIANCE WITH NEW ENVIRONMENTAL LAWS AND ITS EXPOSURE TO
POTENTIAL LIABILITIES ASSOCIATED WITH THE ENVIRONMENTAL CONDITION OF ITS
FACILITIES COULD ADVERSELY AFFECT ITS PROFITABILITY.

Texas Genco's business is subject to extensive environmental regulation by
federal, state and local authorities. Texas Genco is required to comply with
numerous environmental laws and regulations, and to obtain numerous governmental
permits, in operating its facilities. Texas Genco may incur significant
additional costs to comply with these requirements. If Texas Genco fails to
comply with these requirements, it could be subject to civil or criminal
liability and fines. Existing environmental regulations could be revised or
reinterpreted, new laws and regulations could be adopted or become applicable to
Texas Genco or its facilities, and future changes in environmental laws and
regulations could occur, including potential regulatory and enforcement
developments related to air emissions. If any of these events occurs, Texas
Genco's business, results of operations, financial condition and cash flows
could be adversely affected.

Texas Genco may not be able to obtain or maintain from time to time all
required environmental regulatory approvals. If there is a delay in obtaining
any required environmental regulatory approvals or if

12

Texas Genco fails to obtain and comply with them, it may not be able to operate
its facilities or it may be required to incur additional costs.

Texas Genco is generally responsible for all on-site liabilities associated
with the environmental condition of its power generation facilities, regardless
of when the liabilities arose and whether the liabilities are known or unknown.
These liabilities may be substantial.

CHANGES IN TECHNOLOGY MAY MAKE TEXAS GENCO'S POWER GENERATION FACILITIES LESS
COMPETITIVE, WHICH COULD ADVERSELY IMPACT THEIR VALUE AND THE RESULTS OF TEXAS
GENCO'S OPERATIONS.

A significant portion of Texas Genco's generation facilities were
constructed many years ago and rely on older technologies. Some of Texas Genco's
competitors may have newer generation facilities and technologies that allow
them to produce and sell power more efficiently, which could adversely affect
Texas Genco's results of operations, financial condition and cash flows. In
addition, research and development activities are ongoing to improve alternate
technologies to produce electricity, including fuel cells, microturbines,
windmills and photovoltaic (solar) cells. It is possible that advances in these
or other technologies will reduce the current costs of electricity production to
a level that is below that of Texas Genco's generation facilities. If this
occurs, Texas Genco's generation facilities will be less competitive and the
value of its power plants could be significantly impaired. Also, electricity
demand could be reduced by increased conservation efforts and advances in
technology that could likewise significantly reduce the value of Texas Genco's
power generation facilities.

OUR NATURAL GAS DISTRIBUTION BUSINESS MUST COMPETE WITH ALTERNATIVE ENERGY

SOURCES.

CERC competes primarily with alternate energy sources such as electricity
and other fuel sources. In some areas, intrastate pipelines, other gas
distributors and marketers also compete directly with CERC for natural gas sales
to end-users. In addition, as a result of federal regulatory changes affecting
interstate pipelines, natural gas marketers operating on these pipelines may be
able to bypass CERC's facilities and market, sell and/or transport natural gas
directly to commercial and industrial customers. Any reduction in the amount of
natural gas marketed, sold or transported by CERC as a result of competition may
have an adverse impact on CERC's results of operations, financial condition and
cash flows.

OUR NATURAL GAS DISTRIBUTION BUSINESS IS SUBJECT TO FLUCTUATIONS IN NATURAL

GAS PRICING LEVELS.

CERC is subject to risk associated with upward price movements of natural
gas. High natural gas prices might affect CERC's ability to collect balances due
from its customers and could create the potential for uncollectible accounts
expense to exceed the recoverable levels built into CERC's tariff rates. In
addition, a sustained period of high natural gas prices could apply downward
demand pressure on natural gas consumers in CERC's service territory.

CERC MAY INCUR CARRYING COSTS ASSOCIATED WITH PASSING THROUGH CHANGES IN THE

COSTS OF NATURAL GAS.

Generally, the regulations of the states in which CERC operates allow it to
pass through changes in the costs of natural gas to its customers through
purchased gas adjustment provisions in the applicable tariffs. There is,
however, a timing difference between its purchases of natural gas and the
ultimate recovery of these costs. Consequently, CERC may incur carrying costs as
a result of this timing difference that are not recoverable from its customers.
The failure to recover those additional carrying costs may have an adverse
effect on CERC's results of operations, financial condition and cash flows.

13

OUR PIPELINES AND GATHERING BUSINESSES MUST COMPETE DIRECTLY WITH OTHERS IN
THE TRANSPORTATION AND STORAGE OF NATURAL GAS AND INDIRECTLY WITH ALTERNATIVE
FORMS OF ENERGY.

Our two interstate pipelines and our gathering systems compete with other
interstate and intrastate pipelines and gathering systems in the transportation
and storage of natural gas. The principal elements of competition are rates,
terms of service, and flexibility and reliability of service. They also compete
indirectly with other forms of energy, including electricity, coal and fuel
oils. The primary competitive factor is price. The actions of CERC's competitors
could lead to lower prices, which may have an adverse impact on CERC's results
of operations, financial condition and cash flows.

IF WE FAIL TO EXTEND CONTRACTS WITH TWO OF OUR SIGNIFICANT INTERSTATE

PIPELINES' CUSTOMERS, IT COULD HAVE AN ADVERSE IMPACT ON CERC'S OPERATIONS.

Contracts with two of our interstate pipelines' significant customers,
Arkla and Laclede, are currently scheduled to expire in 2005 and 2007,
respectively. To the extent the pipelines are unable to extend these contracts
or the contracts are renegotiated at rates substantially different than the
rates provided in the current contracts, it could have an adverse effect on
CERC's results of operations, financial condition and cash flows.

OUR INTERSTATE PIPELINES ARE SUBJECT TO FLUCTUATIONS IN THE SUPPLY OF GAS.

Our interstate pipelines largely rely on gas sourced in the various supply
basins located in the Midcontinent region of the United States. To the extent
the availability of this supply is substantially reduced, it could have an
adverse effect on CERC's results of operations, financial condition and cash
flows.

CERC'S REVENUES AND RESULTS OF OPERATIONS ARE SEASONAL.

A portion of CERC's revenues are derived from natural gas sales and
transportation. Thus, CERC's revenues and results of operations are subject to
seasonality, weather conditions and other changes in natural gas usage, with
revenues being higher during the winter months.

ITEM 3. LEGAL PROCEEDINGS

For a brief description of certain legal and regulatory proceedings
affecting us, see "Regulation" and "Environmental Matters" in Item 1 of this
report and Notes 4 and 13 to our consolidated financial statements.

14

EXHIBIT 99.4

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

Our past earnings and results of operations are not necessarily indicative
of our future earnings and results of operations. The magnitude of our future
earnings and results of our operations will depend on numerous factors
including:

- state and federal legislative and regulatory actions or developments,
including deregulation, re-regulation and restructuring of the electric
utility industry, constraints placed on our activities or business by the
1935 Act, changes in or application of laws or regulations applicable to
other aspects of our business and actions with respect to:

- approval of stranded costs;

- allowed rates of return;

- rate structures;

- recovery of investments; and

- operation and construction of facilities;

- non-payment for our services due to financial distress of our customers,
including Reliant Resources;

- the successful and timely completion of our capital projects;

- industrial, commercial and residential growth in our service territory
and changes in market demand and demographic patterns;

- changes in business strategy or development plans;

- the timing and extent of changes in commodity prices, particularly
natural gas;

- commercial bank and financial market conditions, our access to capital,
the cost of such capital, receipt of certain approvals under the 1935
Act, and the results of our financing and refinancing efforts, including
availability of funds in the debt capital markets;

- actions by rating agencies;

- legal and administrative proceedings and settlements;

- changes in tax laws;

- inability of various counterparties to meet their obligations with
respect to our financial instruments;

- any lack of effectiveness of our disclosure controls and procedures;

- changes in technology;

- significant changes in our relationship with our employees, including the
availability of qualified personnel and the potential adverse effects if
labor disputes or grievances were to occur;

- significant changes in critical accounting policies;

- acts of terrorism or war, including any direct or indirect effect on our
business resulting from terrorist attacks such as occurred on September
11, 2001 or any similar incidents or responses to those incidents;

- the availability and price of insurance;

- the outcome of the pending securities lawsuits against us, Reliant Energy
and Reliant Resources;

- the outcome of the Securities and Exchange Commission investigation
relating to the treatment in our consolidated financial statements of
certain activities of Reliant Resources;

- the ability of Reliant Resources to satisfy its indemnity obligations to
us;

- the reliability of the systems, procedures and other infrastructure
necessary to operate the retail electric business in our service
territory, including the systems owned and operated by the ERCOT ISO;

- political, legal, regulatory and economic conditions and developments in
the United States; and

- other factors discussed in Item 1 of this report under "Risk Factors."

2

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(D) LONG-LIVED ASSETS AND INTANGIBLES

The Company records property, plant and equipment at historical cost. The
Company expenses repair and maintenance costs as incurred. Property, plant and
equipment includes the following:

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which provides
that goodwill and certain intangibles with indefinite lives will not be
amortized into results of operations, but instead will be reviewed periodically
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles with
indefinite lives is more than its fair value. On January 1, 2002, the Company
adopted the provisions of the statement that apply to goodwill and intangible
assets acquired prior to June 30, 2001.

3

With the adoption of SFAS No. 142, the Company ceased amortization of
goodwill as of January 1, 2002. A reconciliation of previously reported net
income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization follows:

The Company recognizes specifically identifiable intangibles, including
land use rights and permits, when specific rights and contracts are acquired.
The Company has no intangible assets with indefinite lives recorded as of
December 31, 2002. The Company amortizes other acquired intangibles on a
straight-line basis over the lesser of their contractual or estimated useful
lives that range from 40 to 75 years for land rights and 4 to 25 years for other
intangibles.

4

Amortization expense for other intangibles for 2000, 2001 and 2002 was $1.3
million, $1.2 million and $1.9 million, respectively. Estimated amortization
expense for the five succeeding fiscal years is as follows (in millions):

The Company completed its review during the second quarter of 2002 pursuant
to SFAS No. 142 for its reporting units in the Natural Gas Distribution,
Pipelines and Gathering and Other Operations business segments. No impairment
was indicated as a result of this assessment.

The Company periodically evaluates long-lived assets, including property,
plant and equipment, goodwill and specifically identifiable intangibles, when
events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable. The determination of whether an impairment has
occurred is based on an estimate of undiscounted cash flows attributable to the
assets, as compared to the carrying value of the assets. An impairment analysis
of generating facilities requires estimates of possible future market prices,
load growth, competition and many other factors over the lives of the
facilities. A resulting impairment loss is highly dependent on these underlying
assumptions.

During the fourth quarter of 2001, the Reliant Resources Distribution was
deemed to be a probable event. As Reliant Resources has an option to purchase
the Company's 81% interest in its generation subsidiary, Texas Genco, in 2004
(see Note 4(b)), the Company was required to evaluate Texas Genco's assets for
potential impairment in accordance with SFAS No. 121, due to an expected
decrease in the number of years the Company expects to hold and operate these
assets. As of December 31, 2001, no impairment had been indicated. As a result
of the distribution of approximately 19% of Texas Genco's common stock to
CenterPoint Energy's shareholders on January 6, 2003, the Company re-evaluated
these assets for impairment as of December 31, 2002 in accordance with SFAS No.
144. As of December 31, 2002, no impairment had been indicated. The Company
anticipates that future events, such as a change in the estimated holding period
of Texas Genco's generation assets, will require the Company to re-evaluate
these assets for impairment between now and 2004. If an impairment is indicated,
it could be material and will not be fully recoverable through the 2004 true-up
proceeding calculations (see Note 4(a)).

The Texas electric restructuring law provides the Company recovery of the
regulatory book value of its Texas generating assets for the amount the net
regulatory book value exceeds the estimated market value. If the Company's 81%
interest in Texas Genco is sold to Reliant Resources or to a third party in the
future, a loss on sale of these assets, or an impairment of the recorded
recoverable electric generation plant mitigation regulatory asset (see Note
3(e)), will occur to the extent the recorded book value of the Texas generating
assets exceeds the regulatory book value. As of December 31, 2002, the recorded
book value was $649 million in excess of the regulatory book value. This amount
declines each year as the recorded book value is depreciated and increases by
the amount of capital expenditures. For further discussion of the difference
between the regulatory book value and the recorded book value, see Note 4.

5

(E) REGULATORY ASSETS AND LIABILITIES

The Company applies the accounting policies established in SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) to the
accounts of the Electric Transmission & Distribution business segment and the
utility operations of the Natural Gas Distribution business segment and to some
of the accounts of the Pipelines and Gathering business segment. For information
regarding Texas Genco's discontinuance of the application of SFAS No. 71 in 1999
and the effect on its regulatory assets and the Texas electric restructuring
law, see Note 4(a).

The following is a list of regulatory assets/liabilities reflected on the
Company's Consolidated Balance Sheets as of December 31, 2001 and 2002:

If events were to occur that would make the recovery of these assets and
liabilities no longer probable, the Company would be required to write off or
write down these regulatory assets and liabilities. In addition, the Company
would be required to determine any impairment of the carrying costs of plant and
inventory assets.

Through December 31, 2001, the Public Utility Commission of Texas (Texas
Utility Commission) provided for the recovery of most of the Company's fuel and
purchased power costs from customers through a fixed fuel factor included in
electric rates. Included in the above table in recoverable electric generation
related regulatory assets, net are $126 million and $66 million of net
regulatory assets related to the recovery of fuel costs as of December 31, 2001
and 2002, respectively. For additional information regarding CenterPoint
Houston's fuel filings, see Note 4(c).

Texas Genco sells, through auctions, entitlements to substantially all of
its installed electric generation capacity, excluding reserves for planned and
forced outages. In September, October and December 2001, and March, July,
October and November 2002, Texas Genco conducted auctions as required by the
Texas Utility Commission and by the master separation agreement with Reliant
Resources.

The capacity auctions were consummated at market-based prices that are
substantially below the estimate of those prices made by the Texas Utility
Commission in the spring of 2001. The Texas electric restructuring law provides
for the recovery in a "true-up" proceeding in 2004 of any difference between
market power prices and the earlier estimates of those prices by the Texas
Utility Commission, using the prices received in the auctions required by the
Texas Utility Commission as the measure of market prices (ECOM true-up). In
2002, CenterPoint Energy recorded approximately $697 million in non-cash revenue
related to the cost recovery of the difference between the market power prices
and the Texas Utility Commission's earlier estimates. For additional information
regarding the capacity auctions and the related true-up proceeding, see Note
4(a).

In 2001, the Company monetized $738 million of regulatory assets in a
securitization financing authorized by the Texas Utility Commission pursuant to
the Texas electric restructuring law. The securitized regulatory assets are
being amortized ratably as transition charges are collected over the life of the
outstanding transition bonds. For additional information regarding the
securitization financing, see Note 4(a).

In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115), the Company reports
"available-for-sale" securities at estimated fair value within other long-term
assets in the Company's Consolidated Balance Sheets and any unrealized gain or
loss, net of tax, as a separate component of shareholders' equity and
accumulated other comprehensive income. In accordance with SFAS No. 115, the
Company reports "trading" securities at estimated fair value in the Company's
Consolidated Balance Sheets, and any unrealized holding gains and losses are
recorded as other income (expense) in the Company's Statements of Consolidated
Operations.

As of December 31, 2001 and 2002, the Company held debt and equity
securities in its nuclear decommissioning trust, which is reported at its fair
value of $169 million and $163 million, respectively, in the Company's
Consolidated Balance Sheets in other long-term assets. Any unrealized losses or
gains are accounted for as a long-term asset/liability as the Company will not
benefit from any gains, and losses will be recovered through the rate-making
process.

As of December 31, 2001 and 2002, the Company held an investment in AOL
Time Warner Inc. (AOL TW) common stock (AOL TW Common), which was classified as
a "trading" security. For information regarding the Company's investment in AOL
TW Common, see Note 7.

In June 1999, the Texas legislature adopted the Texas electric
restructuring law, which substantially amended the regulatory structure
governing electric utilities in Texas in order to allow retail electric
competition. Retail pilot projects allowing competition for up to 5% of each
utility's load in all customer classes began in the third quarter of 2001, and
retail electric competition for all other customers began in January 2002. In
preparation for competition, the Company made significant changes in the
electric utility operations it conducts through its former electric utility
division, Reliant Energy HL&P (now CenterPoint Houston). In addition, the Texas
Utility Commission issued a number of new rules and determinations in
implementing the Texas electric restructuring law.

The Texas electric restructuring law defined the process for competition
and created a transition period during which most utility rates were frozen at
rates not in excess of their then-current levels. The Texas electric
restructuring law provided for utilities to recover their generation related
stranded costs and regulatory assets (as defined in the Texas electric
restructuring law).

Unbundling. As of January 1, 2002, electric utilities in Texas such as
CenterPoint Houston unbundled their businesses in order to separate power
generation, transmission and distribution, and retail activities into different
units. Pursuant to the Texas electric restructuring law, the Company submitted a
plan in January 2000 that was later amended and updated to accomplish the
required separation (the business separation plan). The transmission and
distribution business continues to be subject to cost-of-service rate regulation
and is responsible for the delivery of electricity to retail customers. The
Company transferred the Texas generation facilities that were formerly part of
Reliant Energy HL&P (Texas generation business) to Texas Genco in connection
with the Restructuring. As a result of these changes, the Company's Texas
generation operations are no longer conducted as part of an integrated utility
and comprise a new business segment, Electric Generation. Additionally, these
operations will not be part of the Company's business if they are acquired in
2004 by Reliant Resources pursuant to an option agreement described below or
they are otherwise sold.

Generation. Power generators began selling electric energy to wholesale
purchasers, including retail electric providers, at unregulated prices on
January 1, 2002. To facilitate a competitive market, each power generation
company affiliated with a transmission and distribution utility is required to
sell at auction 15% of the output of its installed generating capacity. The
first auction was held in September 2001 for power delivered beginning January
1, 2002. This obligation continues until January 1, 2007 unless before that date
the Texas Utility Commission determines that at least 40% of the quantity of
electric power consumed in 2000 by residential and small commercial load in the
electric utility's service area is being served by retail electric providers
other than an affiliated or formerly affiliated retail electric provider. Texas
Genco plans to auction all of its remaining capacity (less approximately 10%
withheld to provide for unforeseen outages) during the time period prior to
Reliant Resources' exercise of the Texas Genco Option discussed below. Pursuant
to the business separation plan, Reliant Resources is entitled to purchase, at
prices established in these auctions, 50% (but no less than 50%) of the
remaining capacity, energy and ancillary services auctioned by Texas Genco.
Sales to Reliant Resources represented approximately 66% of Texas Genco's total
revenues in 2002.

8

Transmission and Distribution Rates. All retail electric providers in
CenterPoint Houston's service area pay the same rates and other charges for
transmission and distribution services.

CenterPoint Houston's distribution rates charged to retail electric
providers are generally based on amounts of energy delivered. Transmission rates
charged to other distribution companies are based on amounts of energy
transmitted under "postage stamp" rates that do not vary with the distance the
energy is being transmitted. All distribution companies in ERCOT pay CenterPoint
Houston the same rates and other charges for transmission services. The
transmission and distribution rates for CenterPoint Houston have been in effect
since January 1, 2002, when electric competition began. This regulated delivery
charge includes the transmission and distribution rate (which includes costs for
nuclear decommissioning and municipal franchise fees), a system benefit fund fee
imposed by the Texas electric restructuring law, a transition charge associated
with securitization of regulatory assets and an excess mitigation credit imposed
by the Texas Utility Commission.

Stranded Costs. CenterPoint Houston will be entitled to recover its
stranded costs (the excess of net regulatory book value of generation assets (as
defined by the Texas electric restructuring law) over the market value of those
assets) and its regulatory assets related to generation. The Texas electric
restructuring law prescribes specific methods for determining the amount of
stranded costs and the details for their recovery. During the transition period
to deregulation (the Transition Period), which included 1998 and the first six
months of 1999, and extending through the base rate freeze period from July 1999
through 2001, the Texas electric restructuring law provided that earnings above
a stated overall annual rate of return on invested capital be used to recover
the Company's investment in generation assets (Accelerated Depreciation). In
addition, during the Transition Period, the redirection of depreciation expense
to generation assets that CenterPoint Houston would otherwise apply to
transmission, distribution and general plant assets was permitted for regulatory
purposes (Redirected Depreciation). Please read the discussion of the accounting
treatment for depreciation for financial reporting purposes below under
"-- Accounting." The Company cannot predict the amount, if any, of these costs
that may not be recovered.

In accordance with the Texas electric restructuring law, beginning on
January 1, 2002, and ending December 31, 2003, any difference between market
power prices received in the generation capacity auctions mandated by the Texas
electric restructuring law and the Texas Utility Commission's earlier estimates
of those prices will be included in the 2004 stranded cost true-up proceeding,
as further discussed below. This component of the true-up is intended to ensure
that neither the customers nor the Company is disadvantaged economically as a
result of the two-year transition period by providing this pricing structure.

On October 24, 2001, CenterPoint Energy Transition Bond Company, LLC (Bond
Company), a Delaware limited liability company and direct wholly owned
subsidiary of CenterPoint Houston, issued $749 million aggregate principal
amount of its Series 2001-1 Transition Bonds pursuant to a financing order of
the Texas Utility Commission. Classes of the bonds have final maturity dates of
September 15, 2007, September 15, 2009, September 15, 2011 and September 15,
2015, and bear interest at rates of 3.84%, 4.76%, 5.16% and 5.63%, respectively.
Scheduled payments on the bonds are from 2002 through 2013. Net proceeds to the
Bond Company from the issuance were $738 million. The Bond Company paid
CenterPoint Houston

9

$738 million for the transition property. Proceeds were used for general
corporate purposes, including the repayment of indebtedness.

The Transition Bonds are secured primarily by the "transition property,"
which includes the irrevocable right to recover, through non-bypassable
transition charges payable by certain retail electric customers, the qualified
costs of CenterPoint Houston authorized by the financing order. The holders of
the Bond Company's bonds have no recourse to any assets or revenues of
CenterPoint Houston, and the creditors of CenterPoint Houston have no recourse
to any assets or revenues (including, without limitation, the transition
charges) of the Bond Company. CenterPoint Houston has no payment obligations
with respect to the Transition Bonds except to remit collections of transition
charges as set forth in a servicing agreement between CenterPoint Houston and
the Bond Company and in an intercreditor agreement among CenterPoint Houston,
the Bond Company and other parties.

The non-bypassable transition charges are required by the financing order
to be trued-up annually, effective November 1, for the term of the transition
charge. CenterPoint Houston filed an annual true-up with the Texas Utility
Commission on August 2, 2002 for transition charges that became effective
November 1, 2002.

Costs associated with nuclear decommissioning will continue to be subject
to cost-of-service rate regulation and are included in a charge to transmission
and distribution customers. For further discussion of the effect of the business
separation plan on funding of the nuclear decommissioning trust fund, see Note
4(b).

True-Up Proceeding. The Texas electric restructuring law and current Texas
Utility Commission implementation guidance provide for a true-up proceeding to
be initiated in or after January 2004. The purpose of the true-up proceeding is
to quantify and reconcile the amount of stranded costs, the capacity auction
true-up, unreconciled fuel costs (see Note 3(e)), and other regulatory assets
associated with CenterPoint Houston's former electric generating operations that
were not previously securitized through the Transition Bonds. The 2004 true-up
proceeding will result in either additional charges being assessed on or credits
being issued to certain retail electric customers. The Company appealed the
Texas Utility Commission's true-up rule on the basis that there are no negative
stranded costs, that the Company should be allowed to collect interest on
stranded costs, and that the premium on the partial stock valuation applies to
only the equity of Texas Genco, not equity plus debt. The Texas court of appeals
issued a decision on February 6, 2003 upholding the rule in part and reversing
in part. The court ruled that there are no negative stranded costs and that the
premium on the partial stock valuation applies only to equity. The court upheld
the Texas Utility Commission's rule that interest on stranded costs begins upon
the date of the final true-up order. On February 21, 2003, the Company filed a
motion for rehearing on the issue that interest on amounts determined in the
true-up proceeding should accrue from an earlier date . The Company has not
accrued interest in its consolidated financial statements, but estimates that
interest could be material. If the court of appeals denies the Company's motion,
then the Company will have 45 days to appeal to the Texas Supreme Court. The
Company has not decided what action, if any, it will take if the motion for
rehearing is denied.

Accounting. Historically, the Company has applied the accounting policies
established in SFAS No. 71. Effective June 30, 1999, the Company applied SFAS
No. 101 to Texas Genco.

In 1999, the Company evaluated the effects that the Texas electric
restructuring law would have on the recovery of its generation related
regulatory assets and liabilities. The Company determined that a pre-tax
accounting loss of $282 million existed because it believes only the economic
value of its generation related regulatory assets (as defined by the Texas
electric restructuring law) will be recoverable. Therefore, the Company recorded
a $183 million after-tax extraordinary loss in the fourth quarter of 1999.
Pursuant to EITF Issue No. 97-4 "Deregulation of the Pricing of
Electricity -- Issues Related to the Application of FASB Statements No. 71 and
No. 101" (EITF No. 97-4), the remaining recoverable regulatory assets are now

10

associated with the transmission and distribution portion of the Company's
electric utility business. For details regarding the Company's regulatory
assets, see Note 3(e).

At June 30, 1999, the Company performed an impairment test of its
previously regulated electric generation assets pursuant to SFAS No. 121 on a
plant specific basis. Under SFAS No. 121, an asset is considered impaired, and
should be written down to fair value, if the future undiscounted net cash flows
expected to be generated by the use of the asset are insufficient to recover the
carrying amount of the asset. For assets that are impaired pursuant to SFAS No.
121, the Company determined the fair value for each generating plant by
estimating the net present value of future cash flows over the estimated life of
each plant. The difference between fair value and net book value was recorded as
a reduction in the current book value. The Company determined that $797 million
of electric generation assets were impaired in 1999. Of this amount, $745
million related to the South Texas Project and $52 million related to two
gas-fired generation plants. The Texas electric restructuring law provides for
recovery of this impairment through regulated cash flows during the transition
period and through charges to transmission and distribution customers. As such,
a regulatory asset was recorded for an amount equal to the impairment loss and
was included on the Company's Consolidated Balance Sheets as a regulatory asset.
The Company recorded amortization expense related to the recoverable impaired
plant costs and other assets created from discontinuing SFAS No. 71 of $221
million during the six months ended December 31, 1999, $329 million in 2000 and
$247 million in 2001.

The impairment analysis requires estimates of possible future market
prices, load growth, competition and many other factors over the lives of the
plants. The resulting impairment loss is highly dependent on these underlying
assumptions. In addition, after January 10, 2004, CenterPoint Houston must
finalize and reconcile stranded costs (as defined by the Texas electric
restructuring law) in a filing with the Texas Utility Commission. Any positive
difference between the regulatory net book value and the fair market value of
the generation assets (as defined by the Texas electric restructuring law) will
be collected through future charges. Any overmitigation of stranded costs may be
refunded by a reduction in future charges. This final reconciliation allows
alternative methods of third party valuation of the fair market value of these
assets, including outright sale, stock valuations and asset exchanges.

In order to reduce potential exposure to stranded costs related to
generation assets, CenterPoint Houston recognized Redirected Depreciation of
$195 million and $99 million in 1998 and for the six months ended June 30, 1999,
respectively, for regulatory and financial reporting purposes. This redirection
was in accordance with the Company's Transition Plan. Subsequent to June 30,
1999, Redirected Depreciation expense could no longer be recorded by the
Company's electric generation business for financial reporting purposes as these
operations are no longer accounted for under SFAS No. 71. During the six months
ended December 31, 1999 and during 2000 and 2001, $99 million, $218 million and
$230 million in depreciation expense, respectively, was redirected from
transmission and distribution for regulatory and financial reporting purposes
and was established as an embedded regulatory asset included in transmission and
distribution related plant and equipment balances. As of December 31, 2001, the
cumulative amount of Redirected Depreciation for regulatory purposes was $841
million, prior to the effects of the October 3, 2001 order discussed below.

Additionally, as allowed by the Texas Utility Commission, in an effort to
further reduce potential exposure to stranded costs related to generation
assets, CenterPoint Houston recorded Accelerated Depreciation of $194 million
and $104 million in 1998 and for the six months ended June 30, 1999,
respectively, for regulatory and financial reporting purposes. Accelerated
Depreciation expense was recorded in accordance with the Company's Transition
Plan during this period. Subsequent to June 30, 1999, Accelerated Depreciation
expense could no longer be recorded by the Company's electric generation
business for financial reporting purposes, as these operations are no longer
accounted for under SFAS No. 71. During the six months ended December 31, 1999
and during 2000 and 2001, $179 million, $385 million and $264 million,
respectively, of Accelerated Depreciation was recorded for regulatory reporting
purposes, reducing the regulatory book value of the Company's electric
generation assets.

11

The Texas Utility Commission issued a final order on October 3, 2001
(October 3, 2001 Order) that established the transmission and distribution
utility rates that became effective in January 2002. In this Order, the Texas
Utility Commission found that CenterPoint Houston had overmitigated its stranded
costs by redirecting transmission and distribution depreciation and by
accelerating depreciation of generation assets as provided under the Transition
Plan and Texas electric restructuring law. As a result of the October 3, 2001
Order, CenterPoint Houston was required to reverse the $841 million embedded
regulatory asset related to Redirected Depreciation, thereby reducing the net
book value of transmission and distribution assets. CenterPoint Houston was
required to record a regulatory liability of $1.1 billion related to Accelerated
Depreciation. The October 3, 2001 Order requires this amount to be refunded
through excess mitigation credits to certain retail electric customers during a
seven-year period which began in January 2002.

As of December 31, 2002, in contemplation of the 2004 true-up proceeding,
CenterPoint Houston has recorded a regulatory asset of $2.0 billion representing
the estimated future recovery of previously incurred stranded costs, which
includes $1.1 billion of previously recorded Accelerated Depreciation plus
Redirected Depreciation, both reversed in 2001. Offsetting this regulatory asset
is a $969 million regulatory liability to refund the excess mitigation to
ratepayers. This estimated recovery is based upon current projections of the
market value of the Company's Texas generation assets to be covered by the 2004
true-up proceeding calculations. The regulatory liability reflects a current
refund obligation arising from prior mitigation of stranded costs deemed
excessive by the Texas Utility Commission. CenterPoint Houston began refunding
excess mitigation credits with January 2002 bills. These credits are to be
refunded over a seven-year period. Because accounting principles generally
accepted in the United States of America require CenterPoint Houston to estimate
fair market values in advance of the final reconciliation, the financial impacts
of the Texas electric restructuring law with respect to the final determination
of stranded costs in the 2004 true-up proceeding are subject to material
changes. Factors affecting such changes may include estimation risk, uncertainty
of future energy and commodity prices and the economic lives of the plants. If
events were to occur that made the recovery of some of the remaining generation
related regulatory assets no longer probable, the Company would write off the
unrecoverable balance of such assets as a charge against earnings.

(B) AGREEMENTS RELATED TO TEXAS GENERATING ASSETS

Pursuant to the business separation plan, on January 6, 2003, the Company
distributed approximately 19% of Texas Genco's 80 million outstanding shares of
common stock to its shareholders in order to establish a public market value for
shares of that stock which will be used in 2004 to calculate how much
CenterPoint Houston will be able to recover as stranded costs. Reliant Resources
has an option to purchase the Company's remaining 81% interest in Texas Genco
(Texas Genco Option). The Texas Genco Option may be exercised between January
10, 2004 and January 24, 2004. The per share exercise price under the option
will be the average daily closing price on the applicable national exchange for
publicly held shares of common stock of Texas Genco for the 30 consecutive
trading days with the highest average closing price during the 120 trading days
immediately preceding January 10, 2004, plus a control premium, up to a maximum
of 10%, to the extent a control premium is included in the valuation
determination made by the Texas Utility Commission relating to the market value
of Texas Genco's common stock equity. The exercise price is also subject to
adjustment based on the difference between the cash dividends paid during the
period there is a public ownership interest in Texas Genco and Texas Genco's
earnings during that period. Reliant Resources has agreed that if it exercises
the Texas Genco Option and purchases the shares of Texas Genco common stock,
Reliant Resources will also purchase all notes and other receivables from Texas
Genco then held by CenterPoint Energy, at their principal amount plus accrued
interest. Similarly, if Texas Genco holds notes or receivables from the Company,
Reliant Resources will assume those obligations in exchange for a payment to
Reliant Resources by the Company of an amount equal to the principal plus
accrued interest. Exercise of the Texas Genco Option by Reliant Resources will
be subject to various regulatory approvals, including Hart-Scott-Rodino
antitrust clearance and United States Nuclear Regulatory Commission (NRC)
license transfer approval.

12

Texas Genco is the beneficiary of the decommissioning trust that has been
established to provide funding for decontamination and decommissioning of a
nuclear electric generation station in which Texas Genco owns a 30.8% interest
(see Note 6). CenterPoint Houston collects through rates or other authorized
charges to its electric utility customers amounts designated for funding the
decommissioning trust, and pays the amounts to Texas Genco. Texas Genco in turn
deposits these amounts into the decommissioning trust. Upon decommissioning of
the facility, in the event funds from the trust are inadequate, CenterPoint
Houston or its successor will be required to collect through rates or other
authorized charges to customers as contemplated by the Texas Utilities Code all
additional amounts required to fund Texas Genco's obligations relating to the
decommissioning of the facility. Following the completion of the
decommissioning, if surplus funds remain in the decommissioning trust, the
excess will be refunded to the ratepayers of CenterPoint Houston or its
successor.

(C) CENTERPOINT HOUSTON REGULATORY FILINGS

CenterPoint Houston and Texas Genco filed their joint application to
reconcile fuel revenues and expenses with the Texas Utility Commission on July
1, 2002. This final fuel reconciliation filing covers reconcilable fuel revenue,
fuel expense and interest of approximately $8.5 billion incurred from August 1,
1997 through January 30, 2002. Also included in this amount is an under-recovery
of $94 million, which was the balance at July 31, 1997 as approved in
CenterPoint Houston's last fuel reconciliation. On January 28, 2003, a
settlement agreement was reached under which it was agreed that certain items
totaling $24 million were written off during the fourth quarter of 2002 and
items totaling $203 million will be carried forward for resolution by the Texas
Utility Commission in late 2003 or early 2004.

(D) ARKLA RATE CASE

In November 2001, CenterPoint Energy Arkla (Arkla) filed a rate request in
Arkansas seeking rates to yield approximately $47 million in additional annual
gross revenue. In August 2002, a settlement was approved by the Arkansas Public
Service Commission (APSC) that is expected to result in an increase in base
rates of approximately $32 million annually. In addition, the APSC approved a
gas main replacement surcharge that is expected to provide $2 million of
additional gross revenue in 2003 and additional amounts in subsequent years. The
new rates included in the final settlement were effective with all bills
rendered on and after September 21, 2002.

(E) OKLAHOMA RATE CASE

In May 2002, Arkla filed a request in Oklahoma to increase its base rates
by $13.7 million annually. In December 2002, a settlement was approved by the
Oklahoma Corporation Commission that is expected to result in an increase in
base rates of approximately $7.3 million annually. The new rates included in the
final settlement were effective with all bills rendered on and after December
29, 2002.

(5) DERIVATIVE INSTRUMENTS

Effective January 1, 2001, the Company adopted SFAS No. 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement requires that derivatives be recognized at
fair value in the balance sheet and that changes in fair value be recognized
either currently in earnings or deferred as a component of other comprehensive
income, depending on the intended use of the derivative instrument as hedging
(a) the exposure to changes in the fair value of an asset or liability (Fair
Value Hedge) or (b) the exposure to variability in expected future cash flows
(Cash Flow Hedge) or (c) the foreign currency exposure of a net investment in a
foreign operation. For a derivative not designated as a hedging instrument, the
gain or loss is recognized in earnings in the period it occurs.

13

Adoption of SFAS No. 133 on January 1, 2001 resulted in an after-tax
increase in net income of $59 million and a cumulative after-tax increase in
accumulated other comprehensive income of $38 million. The adoption also
increased current assets, long-term assets, current liabilities and long-term
liabilities by approximately $88 million, $5 million, $53 million and $2
million, respectively, in the Company's Consolidated Balance Sheet.

The Company is exposed to various market risks. These risks arise from
transactions entered into in the normal course of business. The Company utilizes
derivative financial instruments such as physical forward contracts, swaps and
options (Energy Derivatives) to mitigate the impact of changes and cash flows of
its natural gas businesses on its operating results and cash flows.

(A) NON-TRADING ACTIVITIES.

Cash Flow Hedges. To reduce the risk from market fluctuations associated
with purchased gas costs, the Company enters into energy derivatives in order to
hedge certain expected purchases and sales of natural gas (non-trading energy
derivatives). The Company applies hedge accounting for its non-trading energy
derivatives utilized in non-trading activities only if there is a high
correlation between price movements in the derivative and the item designated as
being hedged. The Company analyzes its physical transaction portfolio to
determine its net exposure by delivery location and delivery period. Because the
Company's physical transactions with similar delivery locations and periods are
highly correlated and share similar risk exposures, the Company facilitates
hedging for customers by aggregating physical transactions and subsequently
entering into non-trading energy derivatives to mitigate exposures created by
the physical positions.

During 2002, no hedge ineffectiveness was recognized in earnings from
derivatives that are designated and qualify as Cash Flow Hedges. No component of
the derivative instruments' gain or loss was excluded from the assessment of
effectiveness. If it becomes probable that an anticipated transaction will not
occur, the Company realizes in net income the deferred gains and losses
recognized in accumulated other comprehensive loss. During the year ended
December 31, 2002, there was a $0.9 million deferred loss recognized in earnings
as a result of the discontinuance of cash flow hedges because it was no longer
probable that the forecasted transaction would occur. Once the anticipated
transaction occurs, the accumulated deferred gain or loss recognized in
accumulated other comprehensive loss is reclassified and included in the
Company's Statements of Consolidated Operations under the caption "Natural Gas
and Purchased Power." Cash flows resulting from these transactions in
non-trading energy derivatives are included in the Statements of Consolidated
Cash Flows in the same category as the item being hedged. As of December 31,
2002, the Company expects $1 million in accumulated other comprehensive loss to
be reclassified into net income during the next twelve months.

The maximum length of time the Company is hedging its exposure to the
variability in future cash flows for forecasted transactions on existing
financial instruments is primarily two years with a limited amount of exposure
up to five years. The Company's policy is not to exceed five years in hedging
its exposure.

Interest Rate Swaps. As of December 31, 2002, the Company had outstanding
interest rate swaps with an aggregate notional amount of $750 million to fix the
interest rate applicable to floating rate short-term debt. These swaps do not
qualify as cash flow hedges under SFAS No. 133, and are marked to market in the
Company's Consolidated Balance Sheets with changes reflected in interest expense
in the Statements of Consolidated Operations. During the year ended December 31,
2002, the Company settled its forward-starting interest rate swaps having an
aggregate notional amount of $1.5 billion at a cost of $156 million. The Company
has designated and accounted for the forward-interest rate swaps as a cash flow
hedge of the Company's exposure to variability in future interest payments on
fixed rate debt the Company anticipates issuing. Accordingly, the Company
recorded the $156 million cost in other comprehensive income, which will be
amortized into interest expense in the same period during which the forecasted
interest payments affect earnings. The Company assesses and measures the hedging
relationship on a quarterly basis by comparing the

14

critical terms of the forward starting interest rate swaps with the expected
terms of the forecasted debt issuance as well as evaluating the probability of
the underlying interest payments occurring. The Company reclassified
approximately $36 million in 2002 as a result of interest payments it believes
are no longer probable of occurring for certain periods.

(B) CREDIT RISKS.

In addition to the risk associated with price movements, credit risk is
also inherent in the Company's non-trading derivative activities. Credit risk
relates to the risk of loss resulting from non-performance of contractual
obligations by a counterparty. The following table shows the composition of the
non-trading derivative assets of the Company as of December 31, 2001 and 2002:

(1) "Investment Grade" is primarily determined using publicly available credit
ratings along with the consideration of credit support (such as parent
company guarantees) and collateral, which encompass cash and standby letters
of credit.

(2) For unrated counterparties, the Company performs financial statement
analysis, considering contractual rights and restrictions and collateral, to
create a synthetic credit rating.

(3) The $22 million non-trading derivative asset includes a $15 million asset
due to trades with Reliant Energy Services, Inc. (Reliant Energy Services)
an affiliate until the date of the Reliant Resources Distribution. As of
December 31, 2002, Reliant Energy Services did not have an Investment Grade
rating.

(C) GENERAL POLICY.

The Company has established a Risk Oversight Committee comprised of
corporate and business segment officers that oversees all commodity price and
credit risk activities, including the Company's trading, marketing, risk
management services and hedging activities. The committee's duties are to
establish the Company's commodity risk policies, allocate risk capital within
limits established by the Company's board of directors, approve trading of new
products and commodities, monitor risk positions and ensure compliance with the
Company's risk management policies and procedures and trading limits established
by the Company's board of directors.

The Company's policies prohibit the use of leveraged financial instruments.
A leveraged financial instrument, for this purpose, is a transaction involving a
derivative whose financial impact will be based on an amount other than the
notional amount or volume of the instrument.

In 1995, the Company sold a cable television subsidiary to Time Warner
Inc.(TW) and received TW convertible preferred stock (TW Preferred) as
consideration. On July 6, 1999, the Company converted its 11 million shares of
TW Preferred into 45.8 million shares of Time Warner common stock (TW Common).
Prior to the conversion, the Company's investment in the TW Preferred was
accounted for under the cost method at a value of $990 million in the Company's
Consolidated Balance Sheets. The TW Preferred which was redeemable after July 6,
2000, had an aggregate liquidation preference of $100 per share (plus accrued
and unpaid dividends), was entitled to annual dividends of $3.75 per share until
July 6, 1999 and was convertible by the Company. Effective on the conversion
date, the shares of TW Common were classified as trading securities under SFAS
No. 115 and an unrealized gain was recorded in the amount of $2.4 billion ($1.5
billion after-tax) to reflect the cumulative appreciation in the fair value of
the Company's investment in Time Warner securities. Unrealized gains and losses
resulting from changes in the market value of the TW Common (now AOL TW Common)
are recorded in the Company's Statements of Consolidated Operations.

(B) ACES

In July 1997, in order to monetize a portion of the cash value of its
investment in TW Preferred, the Company issued 22.9 million of its unsecured 7%
Automatic Common Exchange Securities (ACES) having an original principal amount
of $1.052 billion and maturing July 1, 2000. The market value of ACES was
indexed to the market value of TW Common. On the July 1, 2000 maturity date, the
Company tendered 37.9 million shares of TW Common to fully settle its
obligations in connection with its unsecured 7% ACES having a value of $2.9
billion.

(C) ZENS

On September 21, 1999, the Company issued approximately 17.2 million of its
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) having an
original principal amount of $1.0 billion. The principal amount per ZENS will
increase each quarter to the extent that the sum of the quarterly cash dividends
and the interest paid during a quarter on the reference shares attributable to
one ZENS is less than $.045, so that the annual yield to investors is not less
than 2.309%. At December 31, 2002, 14.4 million ZENS were outstanding. At
maturity the holders of the ZENS will receive in cash the higher of the original
principal amount of the ZENS (subject to adjustment as discussed above) or an
amount based on the then-current market value of AOL TW Common, or other
securities distributed with respect to AOL TW Common

16

(1.5 shares of AOL TW Common and such other securities, if any, are referred to
as reference shares). Each ZENS has a principal amount of $58.25, and is
exchangeable at any time at the option of the holder for cash equal to 95% (100%
in some cases) of the market value of the reference shares attributable to one
ZENS. The Company pays interest on each ZENS at an annual rate of 2% plus the
amount of any quarterly cash dividends paid in respect of the quarterly interest
period on the reference shares attributable to each ZENS. Subject to some
conditions, the Company has the right to defer interest payments from time to
time on the ZENS for up to 20 consecutive quarterly periods. As of December 31,
2002, no interest payments on the ZENS had been deferred.

In 2002, holders of approximately 16% of the 17.2 million ZENS originally
issued exercised their right to exchange their ZENS for cash, resulting in
aggregate cash payments by CenterPoint Energy of approximately $45 million.

A subsidiary of the Company owns shares of AOL TW Common and elected to
liquidate a portion of such holdings to facilitate the Company's making the cash
payments for the ZENS exchanged in 2002. In connection with the exchanges in
2002, the Company received net proceeds of approximately $43 million from the
liquidation of approximately 4.1 million shares of AOL TW Common at an average
price of $10.56 per share. The Company now holds 21.6 million shares of AOL TW
Common which are classified as trading securities under SFAS No. 115 and are
expected to be held to facilitate the Company's ability to meet its obligation
under the ZENS.

Prior to January 1, 2001, an increase in the market value per share of TW
Common above $58.25 (subject to some adjustments) resulted in an increase in the
Company's liability for the ZENS. However, as the market value per share of TW
Common declined below $58.25 (subject to some adjustments), the liability for
the ZENS did not decline below the original principal amount. Upon adoption of
SFAS No. 133 effective January 1, 2001, the ZENS obligation was bifurcated into
a debt component and a derivative component (the holder's option to receive the
appreciated value of AOL TW Common at maturity). The derivative component was
valued at fair value and determined the initial carrying value assigned to the
debt component ($121 million) as the difference between the original principal
amount of the ZENS ($1.0 billion) and the fair value of the derivative component
at issuance ($879 million). Effective January 1, 2001 the debt component was
recorded at its accreted amount of $122 million and the derivative component was
recorded at its fair value of $788 million, as a current liability, resulting in
a transition adjustment pre-tax gain of $90 million ($59 million net of tax).
The transition adjustment gain was reported in the first quarter of 2001 as the
effect of a change in accounting principle. Subsequently, the debt component
accretes through interest charges at 17.5% annually up to the minimum amount
payable upon maturity of the ZENS in 2029 (approximately $915 million) which
reflects exchanges and adjustments to maintain a 2.309% annual yield, as
discussed above. Changes in the fair value of the derivative component are
recorded in the Company's Statements of Consolidated Operations. During 2001 and
2002, the Company recorded a loss of $70 million and $500 million, respectively,
on the Company's investment in AOL TW Common. During 2001 and 2002, the Company
recorded a gain of $58 million and $480 million, respectively, associated with
the fair value of the derivative component of the ZENS obligation. Changes in
the fair value of the AOL TW Common held by the Company are expected to
substantially offset changes in the fair value of the derivative component of
the ZENS.

(1) Includes amounts due or exchangeable within one year of the date noted.

(2) In the first quarter of 2002, CERC reduced its trade receivables facility
from $350 million to $150 million. Advances under the receivables facility
aggregating $196 million were repaid in January 2002 with proceeds from the
issuance of commercial paper and from the liquidation of short-term
investments. For further discussion of the receivables facility, see Note
3(i).

(3) The $391 million of other short-term borrowings at December 31, 2001
reflects a note payable to Reliant Resources, which was repaid in 2002.

(4) Upon adoption of SFAS No. 133 effective January 1, 2001, the Company's ZENS
obligation was bifurcated into a debt component and an embedded derivative
component. For additional information regarding ZENS, see Note 7(c). As
ZENS are exchangeable for cash at any time at the option of the holders,
these notes are classified as a current portion of long-term debt.

(5) These series of debt are secured by first mortgage bonds of CenterPoint
Houston.

(6) $527 million of these series of debt is secured by general mortgage bonds
of CenterPoint Houston.

(7) On February 28, 2003, CenterPoint Energy amended and extended the
termination date of its $3.85 billion credit facility to June 30, 2005 as
discussed further below. As a result of this extension, the $3.85 billion
credit facility has been classified as long-term debt as of December 31,
2002 in the Consolidated Balance Sheet.

(8) The December 31, 2001 debt balances have been reclassified to give effect
to the Restructuring, which occurred on August 31, 2002.

(9) For further discussion of the securitization financing, see Note 4(a).

(10) London inter-bank offered rate (LIBOR) has a minimum rate of 3%. This term
loan is secured by general mortgage bonds of CenterPoint Houston.

(11) Debt acquired in business acquisitions is adjusted to fair market value as
of the acquisition date. Included in long-term debt is additional
unamortized premium related to fair value adjustments of long-term debt of
$9 million and $7 million at December 31, 2001 and 2002, respectively,
which is being amortized over the respective remaining term of the related
long-term debt.

During 2002, the Company recorded a $26 million loss on the early
extinguishment of debt related to CenterPoint Houston's $850 million term loan
and the repurchase of $175 million of the Company's pollution control bonds.

(b) LONG-TERM DEBT

On February 28, 2003, the Company reached agreement with a syndicate of
banks on a second amendment to its $3.85 billion bank facility (the "Second
Amendment"). Under the Second Amendment, the maturity date of the bank facility
was extended from October 2003 to June 30, 2005, and the $1.2 billion in
mandatory prepayments that would have been required this year (including $600
million due on February 28, 2003) were eliminated. The facility consists of a
$2.35 billion term loan and a $1.5 billion revolver. Borrowings bear interest
based on LIBOR rates under a pricing grid tied to the Company's credit rating.
At our current credit ratings, the pricing for loans remains the same. The drawn
cost for the facility at our current ratings is LIBOR plus 450 basis points. The
Company has agreed to pay the banks an extension fee of 75 basis points on the
amounts outstanding under the bank facility on October 9, 2003. The Company also
paid $41 million in fees that were due on February 28, 2003, along with $20
million in fees that had been due on June 30, 2003.

In addition, the interest rates will be increased by 25 basis points
beginning May 28, 2003 if the Company does not grant the banks a security
interest in our 81% stock ownership of Texas Genco. Granting the security
interest in the stock of Texas Genco requires approval from the Securities and
Exchange Commission (SEC) under the 1935 Act, which is currently being sought.
That security interest would be released when the Company sells Texas Genco,
which is expected to occur in 2004. Proceeds from the sale will be used to
reduce the bank facility.

Also under the Second Amendment, on or before May 28, 2003, the Company
expects to grant to the banks warrants to purchase up to 10%, on a fully diluted
basis, of our common stock at a price equal to the greater of $6.56 per share or
110% of the closing price on the New York Stock Exchange on the date the
warrants are issued. The warrants would not be exercisable for a year after
issuance but would remain outstanding for four years; provided, that if the
Company reduces the bank facility during 2003 by specified amounts, the warrants
will be extinguished. To the extent that the Company reduces the bank facility
by up to

18

$400 million on or before May 28, 2003, up to half of the warrants will be
extinguished on a basis proportionate to the reduction in the credit facility.
To the extent such warrants are not extinguished on or before May 28, 2003, they
will vest and become exercisable in accordance with their terms. Whether or not
the Company is able to extinguish warrants on or before May 28, 2003, the
remaining 50% of the warrants will be extinguished, again on a proportionate
basis, if the Company reduces the bank facility by up to $400 million by the end
of 2003. The Company plans to eliminate the warrants entirely before they vest
by accessing the capital markets to fund the total payments of $800 million
during 2003; however, because of current financial market conditions and
uncertainties regarding such conditions over the balance of the year, there can
be no assurance that the Company will be able to extinguish the warrants or to
do so on favorable terms.

The warrants and the underlying common stock would be registered with the
SEC and could be exercised either through the payment of the purchase price or
on a "cashless" basis under which the Company would issue a number of shares
equal to the difference between the then-current market price and the warrant
exercise price. Issuance of the warrants is also subject to obtaining SEC
approval under the 1935 Act, which is currently being sought. If that approval
is not obtained on or before May 28, 2003, the Company will provide the banks
equivalent cash compensation over the term that its warrants would have been
exercisable to the extent they are not otherwise extinguished.

In the Second Amendment, the Company also agreed that its quarterly common
stock dividend will not exceed $0.10 per share. If the Company has not reduced
the bank facility by a total of at least $400 million by the end of 2003, of
which at least $200 million has come from the issuance of capital stock or
securities linked to capital stock (such as convertible debt), the maximum
dividend payable during 2004 and for the balance of the term of the facility is
subject to an additional test. Under that test the maximum permitted quarterly
dividend will be the lesser of (i) $0.10 per share or (ii) 12.5% of the
Company's net income per share for the 12 months ended on the last day of the
previous quarter.

The Second Amendment provides that proceeds from capital stock or
indebtedness issued or incurred by the Company must be applied (subject to a
$200 million basket for CERC and another $250 million basket for borrowings by
the Company and other limited exceptions) to repay bank loans and reduce the
bank facility. Similarly, cash proceeds from the sale of assets of more than $30
million or, if less, a group of sales aggregating more than $100 million, must
be applied to repay bank loans and reduce the bank facility, except that
proceeds of up to $120 million can be reinvested in the Company's businesses.

On November 12, 2002, CenterPoint Houston entered into a $1.3 billion
collateralized term loan maturing November 2005. The interest rate on the loan
is LIBOR plus 9.75%, subject to a minimum rate of 12.75%. The loan is secured by
CenterPoint Houston's general mortgage bonds. Proceeds from the loan were used
to (1) repay CenterPoint Houston's $850 million term loan, (2) pay costs of
issuance, (3) repay $300 million of debt that matured on November 15, 2002 and
(4) to purchase $100 million of pollution control bonds on December 1, 2002. The
loan agreement contains various business and financial covenants including a
covenant restricting CenterPoint Houston's debt, excluding transition bonds, as
a percent of its total capitalization to 68%. The loan agreement also limits
incremental secured debt that may be issued by CenterPoint Houston to $300
million.

Maturities. The Company's maturities of long-term debt and sinking fund
requirements, excluding the ZENS obligation, are $706 million in 2003 (of which
$500 million may be remarketed by an option holder to a maturity of 2013), $47
million in 2004, $5.6 billion in 2005, $210 million in 2006 and $68 million in
2007. The 2003 and 2004 amounts are net of sinking fund payments that can be
satisfied with bonds that had been acquired and retired as of December 31, 2002.

Liens. CenterPoint Houston's assets are subject to liens securing
approximately $1.2 billion of first mortgage bonds. Sinking or improvement fund
and replacement fund requirements on the first mortgage bonds may be satisfied
by certification of property additions. Sinking fund and replacement fund
requirements

19

for 2000, 2001 and 2002 have been satisfied by certification of property
additions. The replacement fund requirement to be satisfied in 2003 is
approximately $347 million, and the sinking fund requirement to be satisfied in
2003 is approximately $15 million. The Company expects CenterPoint Houston to
meet these 2003 obligations by certification of property additions. CenterPoint
Houston's assets are subject to liens securing approximately $1.8 billion of
general mortgage bonds which are junior to the liens of the first mortgage
bonds.

Securitization. For a discussion of the securitization financing completed
in October 2001, see Note 4(a).

Purchase of Pollution Control Bonds. In the fourth quarter of 2002, the
Company purchased $175 million of pollution control bonds issued on its behalf.
The Company expects to remarket the bonds during the first half of 2003.

Purchase of Convertible Debentures. At December 31, 2001 and 2002, CERC
Corp. had issued and outstanding $86 million and $79 million, respectively,
aggregate principal amount ($82 million and $76 million, respectively, carrying
amount) of its 6% Convertible Subordinated Debentures due 2012 (Subordinated
Debentures). The holders of the Subordinated Debentures receive interest
quarterly and, prior to the Restructuring, had the right at any time on or
before the maturity date thereof to convert each $50 principal amount of
Subordinated Debentures into 0.65 shares of Reliant Energy common stock and
$14.24 in cash. After the Restructuring, but prior to the Reliant Resources
Distribution, each $50 principal amount of Subordinated Debentures was
convertible into 0.65 shares of CenterPoint Energy common stock and $14.24 in
cash. The Reliant Resources Distribution and the Texas Genco stock distribution
changed the conversion rights for each $50 principal amount of Subordinated
Debentures as follows:

TERM Notes. CERC Corp.'s $500 million aggregate principal amount of 6 3/8%
Term Enhanced ReMarketable Securities (TERM Notes) provide an investment bank
with a call option, that gives it the right to have the TERM Notes tendered to
it by the holders on November 1, 2003 and then remarketed if it chooses to
exercise the option. The TERM Notes are unsecured obligations of CERC Corp. that
bear interest at an annual rate of 6 3/8% through November 1, 2003. On November
1, 2003, the holders of the TERM Notes are required to tender their notes at
100% of their principal amount. The portion of the proceeds attributable to the
call option premium will be amortized over the stated term of the securities. If
the option is not exercised by the investment bank, CERC Corp. will repurchase
the TERM Notes at 100% of their principal amount on November 1, 2003. If the
option is exercised, the TERM Notes will be remarketed on a date, selected by
CERC Corp., within the 52-week period beginning November 1, 2003. CERC Corp. may
elect into this 52-week remarketing window only if its senior unsecured debt
securities are rated at least Baa3 by Moody's Investors Service, Inc. and BBB-
by Standard & Poor's Ratings Services, a division of The McGraw Hill Companies
(unless the investment banker waives that requirement). During this period and
prior to remarketing, the TERM Notes will bear interest at rates, adjusted
weekly, based on an index selected by CERC Corp. CERC Corp. may elect to redeem
the TERM Notes in whole, but not in part, from the investment bank prior to
remarketing. If the TERM Notes are remarketed, the final maturity date of the
TERM Notes will be November 1, 2013, subject to adjustment, and the effective
interest rate on the

20

remarketed TERM Notes will be 5.66% plus CERC Corp.'s applicable credit spread
at the time of such remarketing.

Transportation Agreement. A subsidiary of CERC Corp. had an agreement (ANR
Agreement) with ANR Pipeline Company (ANR) that contemplated that this
subsidiary would transfer to ANR an interest in some of CERC Corp.'s pipeline
and related assets. In 2001, this subsidiary was transferred to Reliant
Resources as a result of CenterPoint Energy's planned divestiture of certain
unregulated business operations. However, CERC retained the pipelines covered by
the ANR Agreement. Therefore, the subsequent divestiture of Reliant Resources by
CenterPoint Energy on September 30, 2002, resulted in a conversion of CERC's
obligation to ANR into an obligation to Reliant Resources. As of December 31,
2001, the Company had recorded $41 million in long-term debt and as of December
31, 2002, the Company had recorded $5 million and $36 million in current portion
of long-term debt and long-term debt, respectively, in its Consolidated Balance
Sheets to reflect this obligation for the use of 130 million cubic feet
(Mmcf)/day of capacity in some of CERC's transportation facilities. The volume
of transportation will decline to 100 Mmcf/day in the year 2003 with a refund by
CERC of $5 million to Reliant Resources. The ANR Agreement will terminate in
2005 with a refund of $36 million to Reliant Resources.

(10) TRUST PREFERRED SECURITIES

In February 1997, two Delaware statutory business trusts created by
CenterPoint Energy (HL&P Capital Trust I and HL&P Capital Trust II) issued to
the public (a) $250 million aggregate amount of preferred securities and (b)
$100 million aggregate amount of capital securities, respectively. In February
1999, a Delaware statutory business trust created by CenterPoint Energy (REI
Trust I) issued $375 million aggregate amount of preferred securities to the
public. CenterPoint Energy accounts for REI Trust I, HL&P Capital Trust I and
HL&P Capital Trust II as wholly owned consolidated subsidiaries. Each of the
trusts used the proceeds of the offerings to purchase junior subordinated
debentures issued by CenterPoint Energy having interest rates and maturity dates
that correspond to the distribution rates and the mandatory redemption dates for
each series of preferred securities or capital securities.

The junior subordinated debentures are the trusts' sole assets and their
entire operations. CenterPoint Energy considers its obligations under the
Amended and Restated Declaration of Trust, Indenture, Guaranty Agreement and,
where applicable, Agreement as to Expenses and Liabilities, relating to each
series of preferred securities or capital securities, taken together, to
constitute a full and unconditional guarantee by CenterPoint Energy of each
trust's obligations with respect to the respective series of preferred
securities or capital securities.

The preferred securities and capital securities are mandatorily redeemable
upon the repayment of the related series of junior subordinated debentures at
their stated maturity or earlier redemption. Subject to some limitations,
CenterPoint Energy has the option of deferring payments of interest on the
junior subordinated debentures. During any deferral or event of default,
CenterPoint Energy may not pay dividends on its capital stock. As of December
31, 2002, no interest payments on the junior subordinated debentures had been
deferred.

21

The outstanding aggregate liquidation amount, distribution rate and
mandatory redemption date of each series of the preferred securities or capital
securities of the trusts described above and the identity and similar terms of
each related series of junior subordinated debentures are as follows:

In June 1996, a Delaware statutory business trust created by CERC Corp.
(CERC Trust) issued $173 million aggregate amount of convertible preferred
securities to the public. CERC Corp. accounts for CERC Trust as a wholly owned
consolidated subsidiary. CERC Trust used the proceeds of the offering to
purchase convertible junior subordinated debentures issued by CERC Corp. having
an interest rate and maturity date that correspond to the distribution rate and
mandatory redemption date of the convertible preferred securities. The
convertible junior subordinated debentures represent CERC Trust's sole asset and
its entire operations. CERC Corp. considers its obligation under the Amended and
Restated Declaration of Trust, Indenture and Guaranty Agreement relating to the
convertible preferred securities, taken together, to constitute a full and
unconditional guarantee by CERC Corp. of CERC Trust's obligations with respect
to the convertible preferred securities.

The convertible preferred securities are mandatorily redeemable upon the
repayment of the convertible junior subordinated debentures at their stated
maturity or earlier redemption. Effective January 7, 2003, the convertible
preferred securities are convertible at the option of the holder into $33.62 of
cash and 2.34 shares of CenterPoint Energy common stock for each $50 of
liquidation value. As of December 31, 2001 and 2002, $0.4 million liquidation
amount of convertible preferred securities were outstanding. The securities, and
their underlying convertible junior subordinated debentures, bear interest at
6.25% and mature in June 2026. Subject to some limitations, CERC Corp. has the
option of deferring payments of interest on the convertible junior subordinated
debentures. During any deferral or event of default, CERC Corp. may not pay
dividends on its common stock to CenterPoint Energy. As of December 31, 2002, no
interest payments on the convertible junior subordinated debentures had been
deferred.

The Company has long-term incentive compensation plans (LICP) that provide
for the issuance of stock-based incentives, including performance-based shares,
performance-based units, restricted shares, stock options and stock appreciation
rights to key employees of the Company, including officers. As of December 31,
2002, 344 current and 443 former employees of the Company participate in the
plans. A maximum of approximately 37 million shares of CenterPoint Energy common
stock may be issued under these plans.

Performance-based shares, performance-based units and restricted shares are
granted to employees without cost to the participants. The performance shares
and units vest three years after the grant date based

22

upon the performance of the Company over a three-year cycle, except as discussed
below. The restricted shares vest at various times ranging from immediately to
at the end of a three-year period. Upon vesting, the shares are issued to the
plan participants.

During 2000, 2001 and 2002, the Company recorded compensation expense of
$22 million, $6 million and $2 million, respectively, related to
performance-based shares, performance-based units and restricted share grants.
Included in these amounts is $7 million and $5 million in compensation expense
for 2000 and 2001, respectively, related to Reliant Resources' participants. In
addition, compensation benefit of $1 million was recorded in 2002 related to
Reliant Resources' participants. Amounts for Reliant Resources' participants are
reflected in discontinued operations in the Statements of Consolidated
Operations.

The following table summarizes the Company's performance-based units,
performance-based shares and restricted share grant activity for the years 2000
through 2002:

The maximum value associated with the performance-based units granted in
2001 was $150 per unit.

Effective with the Reliant Resources Distribution which occurred on
September 30, 2002, the Company's compensation committee authorized the
conversion of outstanding CenterPoint Energy performance-based shares for the
performance cycle ending December 31, 2002 to a number of time-based restricted
shares of CenterPoint Energy's common stock equal to the number of
performance-based shares that would have vested if the performance objectives
for the performance cycle were achieved at the maximum level for substantially
all shares. These time-based restricted shares vested if the participant holding
the shares remained employed with the Company or with Reliant Resources and its
subsidiaries through December 31, 2002. On the date of the Reliant Resources
Distribution, holders of these time-based restricted shares received shares of
Reliant Resources common stock in the same manner as other holders of
CenterPoint Energy common stock, but these shares of common stock were subject
to the same time-based vesting schedule, as well as to the terms and conditions
of the plan under which the original performance shares were granted. Thus,
following the

23

Reliant Resources Distribution, employees who held performance-based shares
under the LICP for the performance cycle ending December 31, 2002 held
time-based restricted shares of CenterPoint Energy common stock and time-based
restricted shares of Reliant Resources common stock, which vested following
continuous employment through December 31, 2002.

Effective with the Reliant Resources Distribution, the Company converted
all outstanding CenterPoint Energy stock options granted prior to the Reliant
Resources Offering to a combination of adjusted CenterPoint Energy stock options
and Reliant Resources stock options. For the converted stock options, the sum of
the intrinsic value of the CenterPoint Energy stock options immediately prior to
the record date of the Reliant Resources Distribution equaled the sum of the
intrinsic values of the adjusted CenterPoint Energy stock options and the
Reliant Resources stock options granted immediately after the record date of the
Reliant Resources Distribution. As such, Reliant Resources employees who do not
work for the Company hold stock options of the Company. Both the number and the
exercise price of all outstanding CenterPoint Energy stock options that were
granted on or after the Reliant Resources Offering were adjusted to maintain the
total intrinsic value of the grants.

During January 2003, due to the distribution of Texas Genco stock, the
Company granted additional CenterPoint Energy shares to participants with
performance-based and time-based shares that had not yet vested as of the record
date of December 20, 2002. These additional shares are subject to the same
vesting schedule and the terms and conditions of the plan under which the
original shares were granted. Also in connection with this distribution, both
the number and the exercise price of all outstanding CenterPoint Energy stock
options were adjusted to maintain the total intrinsic value of the stock option
grants.

Under the Company's plans, stock options generally become exercisable in
one-third increments on each of the first through third anniversaries of the
grant date. The exercise price is the average of the high and low sales price of
the common stock on the New York Stock Exchange on the grant date. The Company
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25), and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for these fixed
stock options. The following table summarizes stock option activity related to
the Company for the years 2000 through 2002:

Exercise prices for CenterPoint Energy stock options outstanding held by
Company employees ranged from $5.00 to $40.00. The following tables provide
information with respect to outstanding CenterPoint Energy stock options held by
the Company's employees on December 31, 2002:

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), and SFAS No. 148, the Company applies the guidance contained in
APB Opinion No. 25 and discloses the required pro forma effect on net income of
the fair value based method of accounting for stock compensation. The weighted
average fair values at date of grant for CenterPoint Energy options granted
during 2000, 2001 and 2002 were $5.07, $9.25 and $1.40, respectively. The fair
values were estimated using the Black-Scholes option valuation model with the
following weighted-average assumptions:

Pro forma information for 2000, 2001 and 2002 is provided to take into
account the amortization of stock-based compensation to expense on a
straight-line basis over the vesting period. Had compensation costs been

25

determined as prescribed by SFAS No. 123, the Company's net income and earnings
per share would have been as follows:

The Company maintains a pension plan which is a non-contributory defined
benefit plan covering substantially all employees using a cash balance formula.
Under the cash balance formula, participants accumulate a retirement benefit
based upon 4% of eligible earnings and accrued interest. Prior to 1999, the
pension plan accrued benefits based on years of service, final average pay and
covered compensation. As a result, certain employees participating in the plan
as of December 31, 1998 are eligible to receive the greater of the accrued
benefit calculated under the prior plan through 2008 or the cash balance
formula.

The Company's funding policy is to review amounts annually in accordance
with applicable regulations in order to achieve adequate funding of projected
benefit obligations. The assets of the pension plans consist principally of
common stocks and interest bearing obligations. Included in such assets are
approximately 4.5 million shares of CenterPoint Energy common stock contributed
from treasury stock during 2001. As of December 31, 2002, the fair value of
CenterPoint Energy common stock was $38 million or 4.7% of the pension plan
assets.

The Company provides certain healthcare and life insurance benefits for
retired employees on a contributory and non-contributory basis. Employees become
eligible for these benefits if they have met certain age and service
requirements at retirement, as defined in the plans. Under plan amendments
effective in early 1999, health care benefits for future retirees were changed
to limit employer contributions for medical coverage.

Such benefit costs are accrued over the active service period of employees.
The net unrecognized transition obligation, resulting from the implementation of
accrual accounting, is being amortized over approximately 20 years.

The Company is required to fund a portion of its obligations in accordance
with rate orders. All other obligations are funded on a pay-as-you-go basis.

26

The Company's net periodic cost (benefit) includes the following components
relating to pension and postretirement benefits:

The following table displays the change in the benefit obligation, the fair
value of plan assets and the amounts included in the Company's Consolidated
Balance Sheets as December 31, 2001 and 2002 for the Company's pension and
postretirement benefit plans:

For the year ended December 31, 2001, the assumed health care cost trend
rates were 7.5% for participants under age 65 and 8.5% for participants age 65
and over. For the year ended December 31, 2002, the assumed health cost trend
rate was increased to 12% for all participants. The health care cost trend rates
decline by .75% annually to 5.5% by 2011.

If the health care cost trend rate assumption were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 2002 would
increase by 2.9%. The annual effect of a 1% increase on the sum of service and
interest cost would be an increase of approximately 2.4%. If the health care
cost trend rate assumption were decreased by 1%, the accumulated postretirement
benefit obligation as of December 31, 2002 would decrease approximately 2.8%.
The annual effect of a 1% decrease on the sum of service and interest cost would
be a decrease of 2.4%.

In addition to the non-contributory pension plans discussed above, the
Company maintains a non-qualified pension plan which allow participants to
retain the benefits to which they would have been entitled under the Company's
non-contributory pension plan except for the federally mandated limits on these
benefits or on the level of compensation on which these benefits may be
calculated. The expense associated with this non-qualified plan was $25 million,
$25 million and $9 million in 2000, 2001 and 2002, respectively. Included in the
net benefit cost in 2001 and 2002 is $17 million and $3 million, respectively,
of expense related to Reliant Resources' participants, which is reflected in
discontinued operations in the Statements of Consolidated Operations. The
accrued benefit liability for the non-qualified pension plan was $99 million and
$83 million at December 31, 2001 and 2002, respectively. In addition, these
accrued benefit liabilities include the recognition of minimum liability
adjustments of $20 million as of December 31, 2001 and $23 million as of
December 31, 2002, which are reported as a component of other comprehensive
income, net of income tax effects. Included in these amounts is $30 million of
accrued benefit liabilities for Reliant Resources' participants as of December
31, 2001. Of these liabilities, $11 million represents the recognition of
minimum

28

liability adjustments, which are reported as discontinued operations on the
Statements of Consolidated Comprehensive Income, net of income tax effects.

(C) SAVINGS PLAN

The Company has an employee savings plan that includes a cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code of 1986, as
amended (the Code). Under the plan, participating employees may contribute a
portion of their compensation, on a pre-tax or after-tax basis, generally up to
a maximum of 16% of compensation. The Company matches 75% of the first 6% of
each employee's compensation contributed. The Company may contribute an
additional discretionary match of up to 50% of the first 6% of each employee's
compensation contributed. These matching contributions are fully vested at all
times. A substantial portion of the Company's match is initially invested in
CenterPoint Energy common stock.

Participating employees may elect to invest all or a portion of their
contributions to the plan in CenterPoint Energy common stock, to have dividends
reinvested in additional shares or to receive dividend payments in cash on any
investment in CenterPoint Energy common stock, and to transfer all or part of
their investment in CenterPoint Energy common stock to other investment options
offered by the plan.

The Company's savings plan includes an Employee Stock Ownership Plan
(ESOP), which contains company stock, a portion of which is encumbered by a
loan. Upon the release from the encumbrance of the loan, the Company may use
released shares to satisfy its obligation to make matching contributions under
the Company's savings plan. Generally, debt service on the loan is paid using
all dividends on shares currently or formerly encumbered by the loan, interest
earnings on funds held in trust and cash contributions by the Company. Shares of
CenterPoint Energy common stock are released from the encumbrance of the loan
based on the proportion of debt service paid during the period.

The Company recognizes benefit expense equal to the fair value of the
shares committed to be released. The Company credits to unearned shares the
original purchase price of shares committed to be released to plan participants
with the difference between the fair value of the shares and the original
purchase price recorded to common stock. Dividends on allocated shares are
recorded as a reduction to retained earnings. Dividends on unallocated shares
are recorded as a reduction of principal or accrued interest on the loan.

Share balances currently or formerly encumbered by a loan at December 31,
2001 and 2002 were as follows:

(1) During 2002, unearned shares and total shares were increased by 831,500
shares. This is due to additional shares purchased with proceeds from the
sale of Reliant Resources common stock, which was received in connection
with the Reliant Resources Distribution.

As a result of the ESOP, the savings plan has significant holdings of
CenterPoint Energy common stock. As of December 31, 2002, an aggregate of
32,099,870 shares of CenterPoint Energy's common stock were held by the savings
plan, which represented 30% of its investments. Given the concentration of the
investments in

29

CenterPoint Energy's common stock, the savings plan and its participants have
market risk related to this investment.

The Company's savings plan benefit expense was $52 million, $51 million and
$47 million in 2000, 2001 and 2002, respectively. Included in these amounts are
$5 million $16 million and $6 million of savings plan benefit expense for 2000,
2001 and 2002, respectively, related to Reliant Resources' participants, which
is reflected as discontinued operations in the Statements of Consolidated
Operations.

(D) POSTEMPLOYMENT BENEFITS

Net postemployment benefit costs for former or inactive employees, their
beneficiaries and covered dependents, after employment but before retirement
(primarily health care and life insurance benefits for participants in the
long-term disability plan) were $2 million, $6 million and $12 million in 2000,
2001 and 2002, respectively.

The Company's postemployment obligation is presented as a liability in the
Consolidated Balance Sheets under the caption "Benefit Obligations."

(E) OTHER NON-QUALIFIED PLANS

The Company has in effect deferred compensation plans which permit eligible
participants to elect each year to defer a percentage of that year's salary and
up to 100% of that year's annual bonus. In general, employees who attain the age
of 60 during employment and participate in the Company's deferred compensation
plans may elect to have their deferred compensation amounts repaid in (a)
fifteen equal annual installments commencing at the later of age 65 or
termination of employment or (b) a lump-sum distribution following termination
of employment. Interest generally accrues on deferrals at a rate equal to the
average Moody's Long-Term Corporate Bond Index plus 2%, determined annually
until termination when the rate is fixed at the rate in effect for the plan year
immediately prior to that in which a participant attains age 65. During 2000,
2001 and 2002, the Company recorded interest expense related to its deferred
compensation obligation of $14 million, $17 million and $11 million,
respectively. Included in these amounts are $1 million, $4 million and $0.2
million of interest expense for 2000, 2001 and 2002, respectively, related to
Reliant Resources' participants, which is reflected as discontinued operations
in the Statements of Consolidated Operations. The discounted deferred
compensation obligation recorded by the Company was $161 million and $132
million as of December 31, 2001 and 2002, respectively.

The Company's obligations under other non-qualified plans are presented as
a liability in the Consolidated Balance Sheets under the caption "Benefit
Obligations."

(F) OTHER EMPLOYEE MATTERS

As of December 31, 2002, approximately 38% of the Company's employees are
subject to collective bargaining agreements. Three of these agreements, covering
approximately 24% of the Company's employees, will expire in 2003.

30

(13) COMMITMENTS AND CONTINGENCIES

(a) COMMITMENTS AND GUARANTEES

Environmental Capital Commitments. CenterPoint Energy anticipates
investing up to $131 million in capital and other special project expenditures
between 2003 and 2007 for environmental compliance. CenterPoint Energy
anticipates expenditures to be as follows (in millions):

Fuel and Purchased Power. Fuel commitments include several long-term coal,
lignite and natural gas contracts related to Texas power generation operations,
which have various quantity requirements and durations that are not classified
as non-trading derivatives assets and liabilities in the Company's Consolidated
Balance Sheets as of December 31, 2002 as these contracts meet the SFAS No. 133
exception to be classified as "normal purchases contracts" or do not meet the
definition of a derivative. Minimum payment obligations for coal and
transportation agreements that extend through 2012 are approximately $292
million in 2003, $165 million in 2004, $169 million in 2005, $174 million in
2006 and $167 million in 2007. Purchase commitments related to lignite mining
and lease agreements and purchased power are not material to CenterPoint
Energy's operations. Prior to January 1, 2002, CenterPoint Houston was allowed
recovery of these costs through rates for electric service. As of December 31,
2002, some of these contracts are above market. CenterPoint Energy anticipates
that stranded costs associated with these obligations will be recoverable
through the stranded cost recovery mechanisms contained in the Texas electric
restructuring law. For information regarding the Texas electric restructuring
law, see Note 4(a).

CenterPoint Energy's other long-term fuel supply commitments, which have
various quantity requirements and durations, are not considered material either
individually or in the aggregate to its results of operations or cash flows.

(b) LEASE COMMITMENTS

The following table sets forth information concerning the Company's
obligations under non-cancelable long-term operating leases at December 31,
2002, which primarily consist of rental agreements for building space, data
processing equipment and vehicles, including major work equipment (in millions).

Total lease expense for all operating leases was $46 million, $45 million
and $43 million during 2000, 2001 and 2002, respectively.

(C) LEGAL, ENVIRONMENTAL AND OTHER REGULATORY MATTERS

Legal Matters

The Company's predecessor, Reliant Energy, and certain of its former
subsidiaries are named as defendants in several lawsuits described below. Under
a master separation agreement between Reliant Energy and Reliant Resources, the
Company and its subsidiaries are entitled to be indemnified by Reliant Resources
for any losses arising out of the lawsuits described under "California Class
Actions and Attorney General Cases," "Long-Term Contract Class Action,"
"Washington and Oregon Class Actions," "Bustamante Price Reporting Class Action"
and "Trading and Marketing Activities," including attorneys' fees and other
costs. Pursuant to the indemnification obligation, Reliant Resources is
defending the Company and its subsidiaries to the extent named in these
lawsuits. The ultimate outcome of these matters cannot be predicted at this
time.

California Class Actions and Attorney General Cases. Reliant Energy,
Reliant Resources, Reliant Energy Services, Inc.(Reliant Energy Services),
Reliant Energy Power Generation, Inc. (REPG) and several other subsidiaries of
Reliant Resources, as well as two former officers and one present officer of
some of these companies, have been named as defendants in class action lawsuits
and other lawsuits filed against a number of companies that own generation
plants in California and other sellers of electricity in California markets.
While the plaintiffs allege various violations by the defendants of antitrust
laws and state laws against unfair and unlawful business practices, each of the
lawsuits is grounded on the central allegation that the defendants conspired to
drive up the wholesale price of electricity. In addition to injunctive relief,
the plaintiffs in these lawsuits seek treble the amount of damages alleged,
restitution of alleged overpayments, disgorgement of alleged unlawful profits
for sales of electricity, costs of suit and attorneys' fees. All of these suits
originally were filed in state courts in San Diego, San Francisco and Los
Angeles Counties. The suits in San Diego and Los Angeles Counties were
consolidated and removed to the federal district court in San Diego, but on
December 13, 2002, that court remanded the suits to the state courts. Prior to
the remand, Reliant Energy was voluntarily dismissed from two of the suits.
Several parties, including the Reliant defendants, have appealed the judge's
remand decision. The United States court of appeals has entered a briefing
schedule that could result in oral arguments by summer of 2003. Proceedings
before the state court are expected to resume during the first quarter of 2003.

In March and April 2002, the California Attorney General filed three
complaints, two in state court in San Francisco and one in the federal district
court in San Francisco, against Reliant Energy, Reliant Resources, Reliant
Energy Services and other subsidiaries of Reliant Resources alleging, among
other matters, violations by the defendants of state laws against unfair and
unlawful business practices arising out of transactions in the markets for
ancillary services run by the California independent systems operator, charging
unjust and unreasonable prices for electricity, in violation of antitrust laws
in connection with the acquisition in 1998 of electric generating facilities
located in California. The complaints variously seek restitution and
disgorgement of alleged unlawful profits for sales of electricity, civil
penalties and fines, injunctive relief against unfair competition, and undefined
equitable relief. Reliant Resources has removed the two state court cases to the
federal district court in San Francisco where all three cases are now pending.

Following the filing of the Attorney General cases, seven additional class
action cases were filed in state courts in Northern California. Each of these
purports to represent the same class of California ratepayers, assert the same
claims as asserted in the other California class action cases, and in some
instances repeat as well the allegations in the Attorney General cases. All of
these cases have been removed to federal district court in San Diego. Reliant
Resources has not filed an answer in any of these cases. The plaintiffs have
agreed to a stipulated order that would require the filing of a consolidated
complaint by early March 2003 and the filing of the defendants' initial response
to the complaint within 60 days after the consolidated complaint is

32

filed. In all of these cases filed before the federal and state courts in
California, the Reliant defendants have filed or intend to file motions to
dismiss on grounds that the claims are barred by federal preemption and the
filed rate doctrine.

Long-Term Contract Class Action. In October 2002, a class action was filed
in state court in Los Angeles against Reliant Energy and several subsidiaries of
Reliant Resources. The complaint in this case repeats the allegations asserted
in the California class actions as well as the Attorney General cases and also
alleges misconduct related to long-term contracts purportedly entered into by
the California Department of Water Resources. None of the Reliant entities,
however, has a long-term contract with the Department of Water Resources. This
case has been removed to federal district court in San Diego.

Washington and Oregon Class Actions. In December 2002, a lawsuit was filed
in Circuit Court of the State of Oregon for the County of Multnomah on behalf of
a class of all Oregon purchasers of electricity and natural gas. Reliant Energy,
Reliant Resources and several Reliant Resources subsidiaries are named as
defendants, along with many other electricity generators and marketers. Like the
other lawsuits filed in California, the plaintiffs claim the defendants
manipulated wholesale power prices in violation of state and federal law. The
plaintiffs seek injunctive relief and payment of damages based on alleged
overcharges for electricity. Also in December 2002, a nearly identical lawsuit
on behalf of consumers in the State of Washington was filed in federal district
court in Seattle. Reliant Resources has removed the Oregon suit to federal
district court in Portland. It is anticipated that before answering the
lawsuits, the defendants will file motions to dismiss on the grounds that the
claims are barred by federal preemption and by the filed rate doctrine.

Bustamante Price Reporting Class Action. In November 2002, California
Lieutenant Governor Cruz Bustamante filed a lawsuit in state court in Los
Angeles on behalf of a class of purchasers of gas and power alleging violations
of state antitrust laws and state laws against unfair and unlawful business
practices based on an alleged conspiracy to report and publish false and
fraudulent natural gas prices with an intent to affect the market prices of
natural gas and electricity in California. Reliant Energy, Reliant Resources and
several Reliant Resources subsidiaries are named as defendants, along with other
market participants and publishers of some of the price indices. The complaint
seeks injunctive relief, compensatory and punitive damages, restitution of
alleged overpayment, disgorgement of all profits and funds acquired by the
alleged unlawful conduct, costs of suit and attorneys' fees. The parties have
stipulated to a schedule that would require the defendants to respond to the
complaint by March 31, 2003. The Reliant defendants intend to deny both their
alleged violation of any laws and their alleged participation in any conspiracy.

Trading and Marketing Activities. Reliant Energy has been named as a party
in several lawsuits and regulatory proceedings relating to the trading and
marketing activities of its former subsidiary, Reliant Resources.

In June 2002, the SEC advised Reliant Resources and Reliant Energy that it
had issued a formal order in connection with its investigation of Reliant
Resources' financial reporting, internal controls and related matters. The
Company understands that the investigation is focused on Reliant Resources'
same-day commodity trading transactions involving purchases and sales with the
same counterparty for the same volume at substantially the same price and
certain structured transactions. These matters were previously the subject of an
informal inquiry by the SEC. Reliant Resources and the Company are cooperating
with the SEC staff.

In connection with the Texas Utility Commission's industry-wide
investigation into potential manipulation of the ERCOT market on and after July
31, 2001, Reliant Energy and Reliant Resources have provided information to the
Texas Utility Commission concerning their scheduling and trading activities.

Fifteen class action lawsuits filed in May, June and July 2002 on behalf of
purchasers of securities of Reliant Resources and/or Reliant Energy have been
consolidated in federal district court in Houston. Reliant Resources and certain
of its executive officers are named as defendants. Reliant Energy is also named
as a

33

defendant in seven of the lawsuits. Two of the lawsuits also name as defendants
the underwriters of the Reliant Resources Offering. One lawsuit names Reliant
Resources' and Reliant Energy's independent auditors as a defendant. The
consolidated amended complaint seeks monetary relief purportedly on behalf of
three classes: (1) purchasers of Reliant Energy common stock from February 3,
2000 to May 13, 2002; (2) purchasers of Reliant Resources common stock on the
open market from May 1, 2001 to May 13, 2002; and (3) purchasers of Reliant
Resources common stock in the Reliant Resources Offering or purchasers of shares
that are traceable to the Reliant Resources Offering. The plaintiffs allege,
among other things, that the defendants misrepresented their revenues and
trading volumes by engaging in round-trip trades and improperly accounted for
certain structured transactions as cash-flow hedges, which resulted in earnings
from these transactions being accounted for as future earnings rather than being
accounted for as earnings in fiscal year 2001.

In February 2003, a lawsuit was filed by three individuals in federal
district court in Chicago against CenterPoint Energy and certain former and
current officers of Reliant Resources for alleged violations of federal
securities laws. The plaintiffs in this lawsuit allege that the defendants
violated federal securities laws by issuing false and misleading statements to
the public, and that the defendants made false and misleading statements as part
of an alleged scheme to inflate artificially trading volumes and revenues. In
addition, the plaintiffs assert claims of fraudulent and negligent
misrepresentation and violations of Illinois consumer law. The defendants expect
to file a motion to transfer this lawsuit to the federal district court in
Houston and to consolidate this lawsuit with the consolidated lawsuits described
above.

The Company believes that none of these lawsuits has merit because, among
other reasons, the alleged misstatements and omissions were not material and did
not result in any damages to any of the plaintiffs.

In May 2002, three class action lawsuits were filed in federal district
court in Houston on behalf of participants in various employee benefits plans
sponsored by Reliant Energy. Reliant Energy and its directors are named as
defendants in all of the lawsuits. Two of the lawsuits have been dismissed
without prejudice. The remaining lawsuit alleges that the defendants breached
their fiduciary duties to various employee benefits plans, directly or
indirectly sponsored by Reliant Energy, in violation of the Employee Retirement
Income Security Act. The plaintiffs allege that the defendants permitted the
plans to purchase or hold securities issued by Reliant Energy when it was
imprudent to do so, including after the prices for such securities became
artificially inflated because of alleged securities fraud engaged in by the
defendants. The complaints seek monetary damages for losses suffered by a
putative class of plan participants whose accounts held Reliant Energy or
Reliant Resources securities, as well as equitable relief in the form of
restitution.

In October 2002, a derivative action was filed in the federal district
court in Houston, against the directors and officers of the Company. The
complaint sets forth claims for breach of fiduciary duty, waste of corporate
assets, abuse of control and gross mismanagement. Specifically, the shareholder
plaintiff alleges that the defendants caused the Company to overstate its
revenues through so-called "round trip" transactions. The plaintiff also alleges
breach of fiduciary duty in connection with the spin-off and the Reliant
Resources Offering. The complaint seeks monetary damages on behalf of the
Company as well as equitable relief in the form of a constructive trust on the
compensation paid to the defendants. The defendants have filed a motion to
dismiss this case on the ground that the plaintiff did not make an adequate
demand on the Company before filing suit.

A Special Litigation Committee appointed by the Company's board of
directors is investigating similar allegations made in a June 28, 2002 demand
letter sent on behalf of a Company shareholder. The letter states that the
shareholder and other shareholders are considering filing a derivative suit on
behalf of the Company and demands that the Company take several actions in
response to alleged round-trip trades occurring in 1999, 2000, and 2001. The
Special Litigation Committee is reviewing the demands made by the shareholder to
determine if these proposed actions are in the best interests of the Company.

34

Reliant Energy Municipal Franchise Fee Lawsuits. In February 1996, the
cities of Wharton, Galveston and Pasadena filed suit, for themselves and a
proposed class of all similarly situated cities in Reliant Energy's electric
service area, against Reliant Energy and Houston Industries Finance, Inc.
(formerly a wholly owned subsidiary of Reliant Energy) alleging underpayment of
municipal franchise fees. The plaintiffs claim that they are entitled to 4% of
all receipts of any kind for business conducted within these cities over the
previous four decades. A jury trial of the original claimant cities (but not the
class of cities) in the 269th Judicial District Court for Harris County, Texas,
ended in April 2000 (the Three Cities case). Although the jury found for Reliant
Energy on many issues, it found in favor of the original claimant cities on
three issues, and assessed a total of $4 million in actual and $30 million in
punitive damages. However, the jury also found in favor of Reliant Energy on the
affirmative defense of laches, a defense similar to a statute of limitations
defense, due to the original claimant cities having unreasonably delayed
bringing their claims during the 43 years since the alleged wrongs began. The
trial court in the Three Cities case granted most of Reliant Energy's motions to
disregard the jury's findings. The trial court's rulings reduced the judgment to
$1.7 million, including interest, plus an award of $13.7 million in legal fees.
In addition, the trial court granted Reliant Energy's motion to decertify the
class. Following this ruling, 45 cities filed individual suits against Reliant
Energy in the District Court of Harris County.

On February 27, 2003, the state court of appeals in Houston rendered an
opinion reversing the judgment against the Company and rendering judgment that
the Three Cities take nothing by their claims. The court of appeals found that
the jury's finding of laches barred all of the Three Cities' claims and that the
Three Cities were not entitled to recovery of any attorneys' fees. The judgment
of the court of appeals is subject to motions for rehearing and an appeal to the
Texas Supreme Court.

The extent to which issues in the Three Cities case may affect the claims
of the other cities served by Reliant Energy cannot be assessed until judgments
are final and no longer subject to appeal. However, the court of appeals' ruling
appears to be consistent with Texas Supreme Court opinions. The Company
estimates the range of possible outcomes for recovery by the plaintiffs in the
Three Cities case to be between $-0- and $18 million inclusive of interest and
attorneys' fees.

Natural Gas Measurement Lawsuits. In 1997, a suit was filed under the
Federal False Claims Act against RERC Corp. (now CERC Corp.) and certain of its
subsidiaries alleging mismeasurement of natural gas produced from federal and
Indian lands. The suit seeks undisclosed damages, along with statutory
penalties, interest, costs, and fees. The complaint is part of a larger series
of complaints filed against 77 natural gas pipelines and their subsidiaries and
affiliates. An earlier single action making substantially similar allegations
against the pipelines was dismissed by the federal district court for the
District of Columbia on grounds of improper joinder and lack of jurisdiction. As
a result, the various individual complaints were filed in numerous courts
throughout the country. This case has been consolidated, together with the other
similar False Claims Act cases, in the federal district court in Cheyenne,
Wyoming.

In addition, CERC Corp., CenterPoint Energy Gas Transmission Company,
CenterPoint Energy Field Services, Inc., and CenterPoint Energy-Mississippi
River Transmission Corporation are defendants in a class action filed in May
1999 against approximately 245 pipeline companies and their affiliates. The
plaintiffs in the case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to systematic gas
mismeasurement by the defendants for more than 25 years. The plaintiffs seek
compensatory damages, along with statutory penalties, treble damages, interest,
costs and fees. The action is currently pending in state court in Stevens
County, Kansas. Motions to dismiss and class certification issues have been
briefed and argued.

City of Tyler, Texas, Gas Costs Review. By letter to CenterPoint Energy
Entex (Entex) dated July 31, 2002, the City of Tyler, Texas, forwarded various
computations of what it believes to be excessive costs ranging from $2.8 million
to $39.2 million for gas purchased by Entex for resale to residential and small
commercial customers in that city under supply agreements in effect since 1992.
Entex's gas costs for its Tyler

35

system are recovered from customers pursuant to tariffs approved by the city and
filed with both the city and the Railroad Commission of Texas (the Railroad
Commission). Pursuant to an agreement, on January 29, 2003, Entex and the city
filed a Joint Petition for Review of Charges for Gas Sales (Joint Petition) with
the Railroad Commission. The Joint Petition requests that the Railroad
Commission determine whether Entex has properly and lawfully charged and
collected for gas service to its residential and commercial customers in its
Tyler distribution system for the period beginning November 1, 1992, and ending
October 31, 2002. The Company believes that all costs for Entex's Tyler
distribution system have been properly included and recovered from customers
pursuant to Entex's filed tariffs and that the city has no legal or factual
support for the statements made in its letter.

Gas Cost Recovery Suits. In October 2002, a suit was filed in state
district court in Wharton County, Texas against the Company, CERC, Entex Gas
Marketing Company, and others alleging fraud, violations of the Texas Deceptive
Trade Practices Act, violations of the Texas Utility Code, civil conspiracy and
violations of the Texas Free Enterprise and Antitrust Act. The plaintiffs seek
class certification, but no class has been certified. The plaintiffs allege that
defendants inflated the prices charged to residential and small commercial
consumers of natural gas. In February 2003, a similar suit was filed against
CERC in state court in Caddo Parish, Louisiana purportedly on behalf of a class
of residential or business customers in Louisiana who allegedly have been
overcharged for gas or gas service provided by CERC. The plaintiffs in both
cases seek restitution for the alleged overcharges, exemplary damages and
penalties. The Company denies that CERC has overcharged any of its customers for
natural gas and believes that the amounts recovered for purchased gas have been
in accordance with what is permitted by state regulatory authorities.

Other Proceedings. The Company is involved in other proceedings before
various courts, regulatory commissions and governmental agencies regarding
matters arising in the ordinary course of business. The Company's management
currently believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

Environmental Matters

Clean Air Standards. Based on current limitations of the Texas Commission
on Environmental Quality regarding NOx emissions in the Houston area, the
Company anticipates it will have invested at least $682 million for emission
control equipment through 2005, including $551 million expended from January 1,
1999 through December 31, 2002, with possible additional expenditures after
2005. NOx control estimates for 2006 and 2007 have not been finalized.

The Texas electric restructuring law provides for stranded cost recovery
for expenditures incurred before May 1, 2003 to achieve the NOx reduction
requirements. Incurred costs include costs for which contractual obligations
have been made. The Texas Utility Commission has determined that the Company's
emission control plan is the most effective control option and that up to $699
million is eligible for cost recovery, the exact amount to be determined in the
2004 true-up proceeding. In addition, the Company is required to provide $16.2
million in funding for certain NOx reduction projects associated with East Texas
pipeline companies. These funds are also eligible for cost recovery.

Hydrocarbon Contamination. On August 24, 2001, 37 plaintiffs filed suit
against REGT, Reliant Energy Pipeline Services, Inc., RERC Corp., Reliant Energy
Services, other Reliant Energy entities and third parties in the 1st Judicial
District Court, Caddo Parish, Louisiana. The petition has now been supplemented
seven times. As of November 21, 2002, there were 695 plaintiffs, a majority of
whom are Louisiana residents. In addition to the Reliant Energy entities, the
plaintiffs have sued the State of Louisiana through its Department of
Environmental Quality, several individuals, some of whom are present employees
of the State of Louisiana, the Bayou South Gas Gathering Company, L.L.C., Martin
Timber Company, Inc., and several trusts. Additionally on April 4, 2002, two
plaintiffs filed a separate suit with identical allegations against the same
parties in the same court. More recently, on January 6, 2003, two other
plaintiffs filed a third suit of

36

similar allegations against the Company, as well as other defendants, in Bossier
Parish (26th Judicial District Court).

The suits allege that, at some unspecified date prior to 1985, the
defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox
Aquifer, which lies beneath property owned or leased by certain of the
defendants and which is the sole or primary drinking water aquifer in the area.
The primary source of the contamination is alleged by the plaintiffs to be a gas
processing facility in Haughton, Bossier Parish, Louisiana known as the "Sligo
Facility." This facility was purportedly used for gathering natural gas from
surrounding wells, separating gasoline and hydrocarbons from the natural gas for
marketing, and transmission of natural gas for distribution. This site was
originally leased and operated by predecessors of REGT in the late 1940s and was
operated until Arkansas Louisiana Gas Company ceased operations of the plant in
the late 1970s.

Beginning about 1985, the predecessors of certain Reliant Energy defendants
engaged in a voluntary remediation of any subsurface contamination of the
groundwater below the property they own or lease. This work has been done in
conjunction with and under the direction of the Louisiana Department of
Environmental Quality. The plaintiffs seek monetary damages for alleged damage
to the aquifer underlying their property, unspecified alleged personal injuries,
alleged fear of cancer, alleged property damage or diminution of value of their
property, and, in addition, seek damages for trespass, punitive, and exemplary
damages. The quantity of monetary damages sought is unspecified. As of December
31, 2002, the Company is unable to estimate the monetary damages, if any, that
the plaintiffs may be awarded in these matters.

Manufactured Gas Plant Sites. CERC and its predecessors operated
manufactured gas plants (MGP) in the past. In Minnesota, remediation has been
completed on two sites, other than ongoing monitoring and water treatment. There
are five remaining sites in CERC's Minnesota service territory, two of which
CERC believes were neither owned or operated by CERC, and for which CERC
believes it has no liability.

At December 31, 2001 and 2002, CERC had accrued $23 million and $19
million, respectively, for remediation of the Minnesota sites. At December 31,
2002, the estimated range of possible remediation costs was $8 million to $44
million based on remediation continuing for 30 to 50 years. The cost estimates
are based on studies of a site or industry average costs for remediation of
sites of similar size. The actual remediation costs will be dependent upon the
number of sites to be remediated, the participation of other potentially
responsible parties (PRP), if any, and the remediation methods used. CERC has an
environmental expense tracker mechanism in its rates in Minnesota. CERC has
collected $12 million at December 31, 2002 to be used for future environmental
remediation.

CERC has received notices from the United States Environmental Protection
Agency and others regarding its status as a PRP for other sites. Based on
current information, the Company has not been able to quantify a range of
environmental expenditures for potential remediation expenditures with respect
to other MGP sites.

Mercury Contamination. The Company's pipeline and distribution operations
have in the past employed elemental mercury in measuring and regulating
equipment. It is possible that small amounts of mercury may have been spilled in
the course of normal maintenance and replacement operations and that these
spills may have contaminated the immediate area with elemental mercury. This
type of contamination has been found by the Company at some sites in the past,
and the Company has conducted remediation at these sites. It is possible that
other contaminated sites may exist and that remediation costs may be incurred
for these sites. Although the total amount of these costs cannot be known at
this time, based on experience by the Company and that of others in the natural
gas industry to date and on the current regulations regarding remediation of
these sites, the Company believes that the costs of any remediation of these
sites will not be material to the Company's financial condition, results of
operations or cash flows.

37

Other Environmental. From time to time the Company has received notices
from regulatory authorities or others regarding its status as a PRP in
connection with sites found to require remediation due to the presence of
environmental contaminants. In addition, the Company has been named as a
defendant in litigation related to such sites and in recent years has been
named, along with numerous others, as a defendant in several lawsuits filed by a
large number of individuals who claim injury due to exposure to asbestos while
working at sites along the Texas Gulf Coast. Most of these claimants have been
workers who participated in construction of various industrial facilities,
including power plants, and some of the claimants have worked at locations owned
by the Company. The Company anticipates that additional claims like those
received may be asserted in the future and intends to continue vigorously
contesting claims which it does not consider to have merit. Although their
ultimate outcome cannot be predicted at this time, the Company does not believe,
based on its experience to date, that these matters, either individually or in
the aggregate, will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.

Department of Transportation

In December 2002, Congress enacted the Pipeline Safety Improvement Act of
2002. This legislation applies to the Company's interstate pipelines as well as
its intra-state pipelines and local distribution companies. The legislation
imposes several requirements related to ensuring pipeline safety and integrity.
It requires companies to assess the integrity of their pipeline transmission and
distribution facilities in areas of high population concentration and further
requires companies to perform remediation activities, in accordance with the
requirements of the legislation, over a 10-year period.

In January 2003, the U.S. Department of Transportation published a notice
of proposed rulemaking to implement provisions of the legislation. The
Department of Transportation is expected to issue final rules by the end of
2003.

While the Company anticipates that increased capital and operating expenses
will be required to comply with the requirements of the legislation, it will not
be able to quantify the level of spending required until the Department of
Transportation's final rules are issued.

Other Matters

The Company is involved in other legal, environmental, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business. Some of
these proceedings involve substantial amounts. The Company's management
regularly analyzes current information and, as necessary, provides accruals for
probable liabilities on the eventual disposition of these matters. The Company's
management believes that the disposition of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

(d) OPERATIONS AGREEMENT WITH CITY OF SAN ANTONIO

Texas Genco has a joint operating agreement with the City Public Service
Board of San Antonio (CPS) to share savings from the joint dispatching of each
party's generating assets. Dispatching the two generating systems jointly
results in savings of fuel and related expenses because there is a more
efficient utilization of each party's lowest cost resources. The two parties
equally share the savings resulting from joint dispatch. The agreement
terminates in 2009.

(e) NUCLEAR INSURANCE

Texas Genco and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property

38

damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.

Pursuant to the Price Anderson Act, the maximum liability to the public of
owners of nuclear power plants was $9.3 billion as of December 31, 2002. Owners
are required under the Price Anderson Act to insure their liability for nuclear
incidents and protective evacuations. Texas Genco and the other owners of the
South Texas Project currently maintain the required nuclear liability insurance
and participate in the industry retrospective rating plan.

There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition, results of operations and cash flows.

(f) NUCLEAR DECOMMISSIONING

Texas Genco contributed $14.8 million per year in 2000 and 2001 to trusts
established to fund its share of the decommissioning costs for the South Texas
Project. In 2002, Texas Genco contributed $2.9 million to these trusts. There
are various investment restrictions imposed upon Texas Genco by the Texas
Utility Commission and the NRC relating to Texas Genco's nuclear decommissioning
trusts. Additionally, Texas Genco's board of directors and CenterPoint Energy's
board of directors have each appointed two members to the Nuclear
Decommissioning Trust Investment Committee which establishes the investment
policy of the trusts and oversees the investment of the trusts' assets. The
securities held by the trusts for decommissioning costs had an estimated fair
value of $163 million as of December 31, 2002, of which approximately 49% were
fixed-rate debt securities and the remaining 51% were equity securities. For a
discussion of the accounting treatment for the securities held in the nuclear
decommissioning trust, see Note 3(k). In July 1999, an outside consultant
estimated Texas Genco's portion of decommissioning costs to be approximately
$363 million. While the funding levels currently exceed minimum NRC
requirements, no assurance can be given that the amounts held in trust will be
adequate to cover the actual decommissioning costs of the South Texas Project.
Such costs may vary because of changes in the assumed date of decommissioning
and changes in regulatory requirements, technology and costs of labor, materials
and equipment. Pursuant to the Texas electric restructuring law, costs
associated with nuclear decommissioning that have not been recovered as of
January 1, 2002, will continue to be subject to cost-of-service rate regulation
and will be included in a charge to transmission and distribution customers.
CenterPoint Energy is contractually obligated to indemnify Texas Genco from and
against any obligations relating to the decommissioning not otherwise satisfied
through collections by CenterPoint Houston. For information regarding the effect
of the business separation plan on funding of the nuclear decommissioning trust
fund, see Note 4(b).